Year-End Tax Planning Strategies for Individuals

Once again, tax planning for the year ahead presents a number of challenges, first and foremost being what tax reform measures (if any) will actually become legislation--and when they take effect (e.g. retroactive to January 1, 2017, or a future date). Furthermore, a number of tax extenders expired at the end of 2016, which may or may not be reauthorized by Congress and made retroactive to the beginning of the year. And then, of course, there are the normal variations in individual tax circumstances such as the sale of a home that could bump up income into another tax bracket.

With this in mind, let's take a look at some of the tax strategies you can use given the current uncertainties.

 

General Tax Planning Need-To-Know

General tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following:

Selling any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.

If you anticipate an increase in taxable income this year (2017) and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2018 tax return in 2019. Don't hesitate to call the office if you have any questions about this.

Prepaying deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.

For example, if you charge a medical expense in December but pay the bill in January, assuming it's an eligible medical expense, it can be taken as a deduction on your 2017 tax return.

If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2018. Exercising this option is often but not always a taxable event; sale of the stock is almost always a taxable event.

If you're self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

 

Accelerating Income and Deductions

Accelerating income into 2017 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2017, depending on your situation.

The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax credits, higher education tax credits and deductions for student loan interest.

Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to "one-time" income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.

Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

Here are several examples of what a taxpayer might do to accelerate deductions:

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2018, by year-end. This does not apply to mortgage escrow accounts.

It may be beneficial to pay 2018 tuition in 2017 to take full advantage of the American Opportunity Tax Credit, an above-the-line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.

Try to bunch "threshold" expenses, such as medical expenses and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). For example, to deduct medical and dental expenses these amounts must exceed 10 percent of AGI. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

Note: The temporary exemption of 7.5 percent for individuals age 65 and older and their spouses expired on December 31, 2016 and is no longer available.

 

Health Care Law

If you haven't signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduces your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately or receive it as a refund when you file your taxes next spring. Please contact the office if you need assistance with this.

 

Additional Medicare Tax

Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2017 tax return next April.

High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.

If you're a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).

 

Alternate Minimum Tax

The Alternative Minimum Tax (AMT) exemption "patch," which was made permanent by the American Taxpayer Relief Act (ATRA) of 2012, is indexed for inflation and it's important not to overlook the effect of any year-end planning moves on the AMT for 2017 and 2018.

Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call if you're not sure whether AMT applies to you.

Note: AMT exemption amounts for 2017 are as follows:

  • $54,300 for single and head of household filers,
  • $84,500 for married people filing jointly and for qualifying widows or widowers,
  • $42,250 for married people filing separately.

Four Solutions That Can Help You With IRS Tax Problems

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Need Help With IRS Problems?

Respond to Notices in a Timely Fashion

Don’t ignore notices you receive in the mail! If a taxpayer receives a notice from the IRS, make sure to respond before the deadline. Keep a copy and proof of mailing, preferably a certified mail receipt to verify mailing and IRS receipt. Taxpayers should explain themselves thoroughly, and attach documents where they will be helpful.

Get in Compliance: File Outstanding Returns and Amend Incorrect Returns

In order to potentially reduce your liability with the IRS or have penalties removed; you need to have the necessary returns filed.  Even if you don’t have the money to pay the balance due, being in compliance (filing outstanding returns) allows you to negotiate with the IRS and potentially get penalties removed from your account.  If your return was filed incorrectly or with missing information, filing an amended return can help you resolve your issues.

Installment Plan

A payment agreement is an agreement with the IRS to pay the taxes you owe within an extended timeframe and avoid IRS collection proceedings.  Your specific tax situation will determine which payment options are available to you. Payment options include paying in full, requesting a short-term agreement (paying in 120 days or less) or a long-term agreement (paying in more than a 120 days). 

Offer In Compromise

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances including your ability to pay, income and expenses, and asset equity.

So take a weight off your shoulders and call JLD Tax & Accounting, take action today!