Year-End Tax Planning

A Guide for Your Future

As the new year approaches, there is still time to affect your 2016 tax filings. Here are some things to keep in mind as you close out the year.

2016 Election Results

The next few months may bring some changes with the impending inauguration of a new president combined with a Republican-controlled Congress.

While unlikely, Congress may try to pass a few impactful new laws, possibly some related to your taxes. In addition, it is reasonable to assume there could be sweeping changes in store for 2017.

Therefore, when reviewing the following information, keep in mind there are a number of unknowns, and the proposed changes are too varied to comment. If you have specific concerns, contact your AKT advisor to discuss.

Law Changes on the Horizon

Congress may not decide the fate of expiring tax breaks until the very end of 2016 (or later). For individuals, these breaks include the exclusion of income on the discharge of indebtedness on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older, and the deduction for qualified tuition and related expenses.

The following energy provisions are also set to expire: the nonbusiness energy property credit, the residential energy property credit, the qualified fuel cell motor vehicle credit, the alternative fuel vehicle refueling property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit.

Reminder: New Deadline Dates

The 2016 filing season brings several noteworthy changes to filing due dates. For example:

  • Partnerships must file Form 1065 a month earlier than previously required.
  • Employers with W-2 reporting requirements will need to distribute them to employees by January 31.
  • FinCen114 will now be due with the individual return, although you have the ability to file for an extension
    to October 15.

The chart below summarizes significant changes and provides greater detail for specific tax forms and their
corresponding deadlines:

Deadline Deadline Extension
Form 1065
March 15 September 15
Form 1120S
March 15 September 15
Form 1041
April 15 September 30
April 15 September 15
(Fiscal Year)
15th day of the 4th month after year end 15th day of the 10th month after year-end
September 15 April 15
Form 1040
April 15 October 15
Report 114
April 15 October 15
W2 January 31 N/A

IRS Announces 2017 Retirement Plan Limits

The IRS adjusts retirement plan limits and certain thresholds annually based on cost-of-living factors. For the most part, these limits and thresholds have not been increased for the last several years.

Here is a summary of the 2017 calendar year limits as well as a look back on the last three calendar years. If you have any questions about how these limits and thresholds affect you and your retirement plan, please contact an AKT advisor to discuss.

Retirement Plan Limits 2017 2016 2015 2014
401(k) & 403(b) Salary Deferral Limit $18,000 $18,000 $18,000 $17,500
401(k) & 403(b) Catch-Up Deferral Limit $6,000 $6,000 $6,000 $5,500
SIMPLE 401(k) Salary Deferral Limit $12,500 $12,500 $12,500 $12,000
SIMPLE 401(k) Catch-Up Deferral Limit $3,000 $3,000 $3,000 $2,500
457(b) Salary Deferral Limit $18,000 $18,000 $18,000 $17,500
Defined Contribution Maximum Annual Addition $54,000 $53,000 $53,000 $52,000
Defined Benefit Maximum Annual Benefit $215,000 $210,000 $210,000 $210,000
Qualified Plan Annual Compensation Limit $270,000 $265,000 $265,000 $260,000
Highly Compensated Employee Limit $120,000 $120,000 $120,000 $115,000
Key Employee Officer Compensation $175,000 $170,000 $170,000 $170,000
Key Employee 1% Owner Compensation $150,000 $150,000 $150,000 $150,000
Social Security Taxable Wage Base $127,200 $118,500 $118,500 $117,000

Year-End Tax Planning Moves for Individuals

Areas of consideration for individuals who want to minimize their tax liabilities include:

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities 31 or more days later in order to avoid wash sales rules. We can help you determine which year-end trades make the most sense.

Postpone income until 2017 and accelerate deductions into 2016 to lower your 2016 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out as adjusted gross income (AGI) increases. These deductions include child tax credits, higher education tax credits, and student loan interest. Postponing income also benefits taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2016.

Consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA. This strategy works if you believe that a Roth IRA is better than a traditional IRA and you are eligible to convert. Keep in mind, however, that such a conversion will increase your AGI for 2016.

Conversely, if you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you can back out of the transaction by re-characterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can reconvert to a Roth IRA at a later date, if conditions prove favorable for that move.

Defer your 2016 bonus to early 2017 if that improves your tax situation and your employer is amenable. Note that your employer may need to pay bonuses in 2016 in order to maximize the company’s tax benefits.

Consider using a credit card to pay deductible expenses before the end of the year. This tactic increases your 2016 deductions even if you don’t pay your credit card bill until after the end of the year. Review your cash flow situation prior to taking on the debt as you will have to pay the expenses at some point.

Increase your withholding of state and local taxes or accelerate payment of estimated taxes before year end if you expect to owe state and local income taxes when you file your return next year. This action pulls the deduction of those taxes into 2016 so long as you aren’t subject to alternative minimum tax (AMT) in 2016.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2016 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem.

Income tax will be withheld from the distribution and applied toward the taxes owed for 2016. Thereafter, you can roll over the gross amount of the distribution (i.e., the net amount you received plus the amount of withheld tax) to a traditional IRA.

No part of the distribution will be includible in income for 2016, but the withheld tax will be applied pro rata over the full 2016 tax year to reduce previous underpayments of estimated tax.

Estimate the effect of any year-end planning moves on the AMT for 2016, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes.

These breaks include the deduction for state and local property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2016, or suspect you might be, these types of deductions should not be accelerated.

See if you can aggregate your miscellaneous itemized deductions for this year and next into your 2016 filing to save on taxes in both years.

Consider accelerating discretionary (elective) procedures or expenses (e.g., dental implants or eyewear) if you are 65 and older. For 2016, the “floor” beneath which medical expenses are not deductible for those age 65 or older is 7.5% of AGI.

Unless Congress changes the rules, this floor will rise to 10% of AGI next year. Taxpayers aged 65 or older who can claim itemized deductions this year may not be able to next year because of the higher floor.

Pay contested taxes before the end of the year and deduct them this year while continuing to contest them next year.

Settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or an other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70½, the first distribution calendar year is the year in which the IRA owner attains age 70½.

Thus, if you turn age 70½ in 2016, you can delay the first required distribution to 2017, but if you do, you will have to take a double distribution in 2017—the amount required for 2016 plus the amount required for 2017.

Think twice before delaying 2016 distributions to 2017, as bunching income into 2017 might push you into a higher tax bracket or affect various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2017 if you will be in a substantially lower bracket that year.

Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.

Contribute to a Health Savings Account (HSA) if you become eligible in or before December of 2016. You can make a full year’s worth of deductible HSA contributions for 2016 in December even if you are enrolled in an applicable health plan for that month only.

Make energy-saving improvements to your home, such as certain high-efficiency insulation materials before the close of 2016. You may qualify for a “nonbusiness energy property credit” that won’t be available after this year unless Congress reinstates it.

Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

Year-End Tax Planning Moves for Business & Business Owners

Whether you own your business or work for someone else, below are a number of tax savings opportunities that could be available for your specific situation.

Make expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000, and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property, i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.The generous dollar ceilings that apply this year mean

The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make purchases before the end of 2016 will be able to deduct most if not all their outlays for machinery and equipment on the 2016 returns. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

Make expenditures that qualify for 50% bonus first-year depreciation if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the full 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.

Take advantage of the “de minimis safe harbor election” to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the uniform capitalization (UNICAP) rules.To qualify for the election, the cost of a unit of

To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement, or “AFS,” e.g., a certified audited financial statement along with an independent CPA’s report. If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2016.

Corporations should consider accelerating income from 2017 to 2016 if they will be in a higher bracket next year. Conversely, they should consider deferring income until 2017 if they will be in a higher bracket this year.

Additionally, corporations should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2016.

That being said, there is never a reason to accelerate income for purposes of the small corporation AMT exemption. If a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2016 and substantial net income in 2017 may find it worthwhile to accelerate just enough of its 2017 income or to defer just enough of its 2016 deductions to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.

Consider whether the 50%-of-W-2 wages limitation applies on the domestic production activities deduction (DPAD) for its 2016 tax year, if your business qualifies for said deduction. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid

Note that the limitation applies to amounts paid with respect to employment in the 2016 calendar year, even if the business has a fiscal year.

To reduce 2016 taxable income, consider deferring a debt-cancellation event until 2017. Also, consider disposing of a passive activity in 2016 if doing so will allow you to deduct suspended passive activity losses.

As we work with you to achieve your goals and objectives, we hope to utilize these tax saving strategies to help structure your 2016 income in a tax efficient manner.

We are excited to announce that beginning January 2017, AKT will be revealing a new brand identity as well as changing our name. While a new name marks a significant milestone in our company’s history, we remain dedicated to guiding clients through all stages of their business and personal financial journey.