As the end of the year quickly approaches, you may be wondering if there is anything you can do to reduce income tax on your 2016 return. Below are 10 ideas shared by Grant Thornton in Accounting Today.
- Accelerate Deductions and Defer Income: Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Bunch Itemized Deductions: Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
- Make Up a Tax Shortfall with Increased Withholding: If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
- Leverage Retirement Account Tax Savings: Contributions to a 401K or IRA reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement.
- Reconsider a Roth IRA Rollover: This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly).
- Get Your Charitable House in Order: If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Give Directly from an IRA: If you are 70 1/2 and older, using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all.Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
- Zero out AMT: Some high-income taxpayers must pay the alternative minimum tax (AMT). You can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
- Don’t Squander Your Gift Tax Exclusion: You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
- Leverage Historically Low Interest Rates: Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.
Remember to talk with your CPA about any of these strategies to make sure you understand the tax implications of any decisions made.
