The surprise election of Donald Trump has turned year-end income tax planning on its ear. Virtually everyone assumed that Hillary would win the election and she promised higher taxes on the highest income earners while trimming deductions. With Trump, the focus is on lower taxes in 2017 and this opens tax strategies you should consider before the end of the year.
Accelerate expenses/postpone income. Small business owners have the best opportunity to take advantage of this strategy. Look for expenses that will come due early next year and pay them this year. Likewise, consider postponing billing customers until January so that the income falls into 2017. If you have a home mortgage, make your January payment before year-end and get an extra interest payment deduction. Finally, while state income taxes are not due until April 15th, 2017, by paying them before year-end, you’ll receive a federal income tax deduction for 2016.
Tax loss harvesting. Special care should be taken when tax loss harvesting this year. The stock market has provided nice returns this year (up 10% as of this writing). If you have already sold stocks for a gain, look for unrealized losses to offset the profits. This is particularly true if you have large realized gains (sale of a business, property or large security sales). This is because the 3.8% Obamacare Surtax on net investment income will apply this year but Trump has vowed to eliminate it in 2017. Remember, up to $3,000 of net realized losses can be deducted from ordinary income this year.
Make charitable gifts. December is a time when lots of people make charitable gifts but this year you should also consider what gifts you plan to also make for 2017. If you’re willing to make them ‘in advance’ before year end you’ll have an opportunity to reduce your overall taxes for the combined 2016 and 2017 tax years.
Avoid buying mutual funds at year-end in taxable accounts. You can end up with a nasty tax surprise since all mutual funds must declare 90% of their gains before year-end. You could end up invested for a short time, have no gains but get hit with a taxable distribution.
Retirement plan contributions. If you have not maxed out your contributions to your company 401-k you can use the remaining paydays to increase your investment and income tax deduction at the same time. You’ll need to contact your human resources department for their assistance in adjusting your payroll deduction. This year you can contribute up to $18,000 to your 401k or similar plan. If you are age 50 or older this year, you can contribute an additional $6,000 for a total of $24,000. At a minimum, calculate and capture your company’s matching contribution! Are you eligible for a tax-deductible IRA? If so, this is another tax deduction worth considering.
Direct IRA transfers to charities. If you’re 70 ½ or older, you’re allowed to make direct transfers from your IRA account to a qualified charity ($100,000 limit) and the transfer satisfies dollar-for-dollar your Required Minimum Distribution. These distributions will be excluded from gross income.
Give a scholarship, get a tax credit. The Alabama Accountability Act allows you to, in effect, re-direct up to half of your State of Alabama income taxes to a qualified Scholarship Granting Organization which provides scholarships for children of low income families who are stuck in a failing public school. The parents use the scholarship funds to transfer the child to a designated private school or a non-failing public school. This costs you nothing but allows you to help a child who wants a better education. For more information, visit www.AlabamaKids.net.