With the year-end fast approaching, and April 15th not too far on the horizon, it’s still not too late to anticipate your tax liability for 2016 and take action to potentially reduce it. Spend a few minutes reviewing the following strategies and discuss them with both your financial advisor and tax attorney, weighing the pros and cons of each as they relate to your specific circumstances.
Actively manage your taxable income and deductions
If your taxable income is nearing a level that might bump you up into a higher tax bracket (see adjacent chart), you may be able to remain in the lower bracket through some combination of deferring discretionary income and/or accelerating your deductions.
|Rate||Single Filers||Married Joint Filers||Head of Household Filers|
|10%||$0 to $9,275||$0 to $18,550||$0 to $13,250|
|15%||$9,275 to $37,650||$18,550 to $75,300||$13,250 to $50,400|
|25%||$37,650 to $91,150||$75,300 to $151,900||$50,400 to $130,150|
|28%||$91,950 to $190,150||$151,900 to $231,450||$130,150 to $210,800|
|33%||$231,450 to $413,350||$210,800 to $413,350||$210,800 to $413,350|
|35%||$413,350 to $415,050||$413,350 to $466,950||$413,350 to $441,000|
If you receive an annual bonus, you may want to ask your employer about the possibility of deferring payment until January. Similarly, self-employed individuals may want to delay invoicing for November/December projects until closer to year-end so that revenue is realized in 2017.
By maximizing your qualified retirement plan savings (e.g., 401(k) and IRA), paying deductible expenses and making charitable contributions this year instead of waiting until next, you may be able to reduce your adjusted gross income (AGI) enough to avoid the higher tax bracket. Make sure, however, that you also factor in income expectations for 2017. If you anticipate dramatically higher income next year, you may want to bite the bullet and save as many of those deductions as you can until next year.
Take advantage of tax loss harvesting
Many investors hear the phrase “tax loss harvesting” and shy away from the idea, assuming that the process is too difficult, complicated and time consuming. But if you hold stocks, bonds or mutual funds in your taxable accounts, you may be able to offset taxable capital gains simply by selling some of the securities in your portfolio that have fallen in value. All you need to know is the price of the security at the time you purchased it (i.e., its “cost basis”).
Any tax loss harvesting sales must occur prior to last business day of the year. And it’s rarely advisable to sell a security solely for tax purposes. So make sure you consult with your advisor and attorney about potential loss harvesting opportunities and how they might impact your overall investment allocation.
Do well by doing good
Not only does charitable giving have a tremendous impact on your community and on the lives of those in need, it can positively impact your tax situation as well. You are allowed to take charitable deductions for up to 50% of your AGI, as long as the organization is a registered 501(c)(3) charity, you receive written receipts for any contributions in excess of $250, and you can justify all other contributions with receipts or bank/credit card statements.
Gifts of highly-appreciated stock can be especially beneficial from a tax planning perspective, as you receive a tax deduction for the current market value of the securities without having to incur the capital gains taxes that a sale would trigger. And high-income individuals over age 70 ½ may want to consider directly transferring funds from their IRA to a qualified charity. These “qualified charitable distributions” (QCDs) can count towards your annual required minimum distribution without impacting your gross income.
Use tax-advantaged accounts for rebalancing
Year end is a time when many investors examine their overall asset allocation and look to rebalance their portfolios. When and where possible, however, you should try to make any necessary adjustments within tax-advantaged retirement accounts rather than initiating transactions in taxable accounts where investment sales may have significant tax ramifications.
It’s important to note that the newly elected administration’s tax policies and goals for future tax reform have yet to become clear, making planning that much more difficult. Therefore, while these last-minute tactics may help to reduce your tax liability for 2016, the best long-term strategy is a comprehensive plan that aligns your current needs and future goals with an optimal investment mix.