With Donald Trump as our president-elect and the Republicans on the verge of controlling both chambers of Congress, many are anticipating significant changes to the US tax code in 2017 that would provide tax relief to companies and individuals alike. For a more details account of the proposed changes click here to read the blog we wrote on the topic a few weeks ago.
Lower tax rates and a reduction or loss of itemized deductions in 2017 means tax minimization strategies are much more valuable this year. Below are a few ideas that you may want to implement before year-end to lower your tax bill and keep more money for yourself.
Accelerate Expenses and Postpone Income
This strategy may be more advantageous to small business owners but individuals can do a few things as well.
For the business owner, look to prepay anticipated expenses that will come up or will be due early next year such as rent, subscription fees, insurance premiums, office supplies, etc. Similarly, postpone invoicing your clients until next year, if your cash flow can support it, and recognize the income in 2017.
Individuals may want to make January’s mortgage payment now and pull the interest expense back into 2016. For those not subject to AMT, go ahead and prepay your January estimated state income tax which can be deducted on your 2016 federal return.
Tax Loss Harvesting (Not available in your IRA or other retirement accounts)
The stock market has performed quite well this year, especially post-election, and this means you may have sold stock and realized a capital gain or most likely you’ll be receiving capital gain distributions from your mutual funds holdings. Or perhaps you sold your business or a piece of real estate and realized significant capital gains.
Whatever the case may be, you may have securities in your portfolio that are sitting at a loss position. You can sell those securities, even if only for a short period of time to avoid the wash-sale rule, and use the realized losses to offset the gains. Harvesting losses and offsetting gains in 2016 may be even more valuable than next year because the proposed tax plans call for the elimination of the 3.8% Obamacare Surtax on net investment income.
Further, for those needing to sell appreciated stock to cover living expenses, perhaps delay the sale until 2017.
Finally, up to $3,000 of realized losses can be used to offset ordinary income this year.
While your 2016 charitable contributions may be on the books, it could be worthwhile thinking ahead about what’s been earmarked for 2017 and making those contributions now. Potentially lower marginal rates next year means the value of the charitable deduction will also be reduced.
Don’t forget, gifting appreciated stock instead of cash helps you avoid the capital gains tax and enhances your tax savings.
Company Sponsored Retirement Plans
As an employee you can defer up to $18,000 of income to your company’s 401(k) or 403(b) plan each year thereby deferring the income tax until retirement. As a bonus, for those of you over the age of 50, the IRS allows for an additional $6,000 to be deferred in what is known as a catch up contribution. With a few pay periods remaining this year there is still time to make deferrals.
Deferred compensation plans also provide an opportunity to delay income tax liability into the future when you expect to pay lower rates. Not all companies sponsor these types of plans but if your company does and you can afford to direct some money to the plan, this can be a powerful tool.
For small business owners who sponsor a profit sharing plan, consider giving your employees a piece of the profit in order to put away up to $53,000 for yourself. Even self-employed folks have the same opportunity via a Solo-401(k).
529 Plan Contributions for PA Residents
While not related to the potential federal income tax changes next year, PA residents should make their 529 Plan contributions before December 31st. For every dollar up to $28,000 contributed to a plan, per child, you’ll receive a 3.07% state income tax deduction. For example, if you contributed $5,000 to a 529 plan this year, you’ll receive a refund or credit against your tax bill of about $154. As a reminder, you do not need to use the PA state sponsored 529 plan to receive the deduction – any state’s plan will do.
With only a few weeks left in the year there is still time to lower your 2016 income tax bill if you act now.