Year-End Tax Tips

As year-end is fast approaching, I wanted to give you a few tips to lower your 2016 tax bill.

Avoid underpayment penalties
Make or adjust your quarterly estimated payments to the IRS by using Form 1040-ES or, if an employee, adjusting your W-4 withholding. Ask your employer for a new W-4 to adjust your allowances or write in the additional amount you want deducted. You can adjust your W-4 at any time during the year.

Itemized deductions

Charitable contributions In addition to cash gifts, you can donate other assets including art, vehicles, and stock (at fair market value on the date of contribution). You can increase the tax benefits of your contribution by donating appreciated stock or property rather than cash. As long as you’ve owned the asset for more than one year, you get a double tax benefit from the donation: you can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the gain.

Time Itemized Deductions
In 2016 the standard deduction will be $6300 for singles and $12,600 for marrieds. If you do not exceed the standard amount (or you are close), consider paying your property taxes twice in one year (for example, pay your current taxes in Jan 2017 and the next year’s in Dec 2017). This could allow you to use the standard deduction every other year and itemize the other year.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.

Contribute the maximum to retirement accounts
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,000 for 2016, $24,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.

Also consider contributing to an IRA. You have until April 17, 2017 to make IRA contributions for 2016. You can contribute a maximum of $5,500 to an IRA for 2016, plus an extra $1,000 if you are 50 or older.

If 70 ½ or older take the required minimum distributions (RMD) from your retirement plan
Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2016, you can delay the first required distribution to April 1, 2017, but if you do, you will have to take a double distribution in 2017 (the amount required for 2016 plus the amount required for 2017). After the first deadline, annual withdrawals must be made by December 31 to avoid the penalty.

Note One of the advantages of the Roth IRA is that the original owner is never required to withdraw money from the account.

Flexible Spending accounts
Watch your flexible spending accounts. This is a use it or lose it account. Set up doctor appointments and get your contacts and glasses before year-end. Increase the amount you set aside for next year in your employer’s health flexible spending account if you set aside too little for this year. The maximum annual contribution to a health flexible spending account is $2,500. …

Gift tax exclusion
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2016 to each of an unlimited number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower tax brackets who are not subject to the kiddie tax.

You should start gathering information early this year to make sure you can complete your mandatory reporting on time. This includes the Form W-2 employers must provide to all employees and the Form 1099 a business must provide to any contractor it pays at least $600 for services. These returns are due to recipients by Jan 1, and this year for the first time, the copies sent to the IRS/Social Security Administration are due the same day, instead of a month later.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.