Year End Tax Planning Update

As we approach the end of the year, this is the time to conduct year-end tax planning in order to optimize your tax position and minimize the amount of penalties and interest that may be due on your 2016 tax return filing.  Year-end tax planning is more than just looking at your income and expenses for the year, it is about looking forward, understanding your business performance, finding positive ways to both help the performance of your company and optimize your tax position in the future.

By looking at the performance of your company to-date, and accounting for any planned futures activities through the end of the year, we can project the net income that the business will earn for the year.  This will allow us to estimate what the business, or owners (if the the business is taxed as an S-Corp, partnership, or a sole-proprietor), will owe in taxes on that income.

For individuals, we will look at the following factors to estimate what their Federal and State Tax Liabilities will be:

  • Lifestyle changes  including a change in marital status and any increases or decreases in number of dependents.
  • Income changes including a change in wages, investment income, passthrough income from an S-Corp, partnership, or sole proprietorship, distributions from a retirement plan.
  • Adjustments to income
  • Projected itemized deductions or tax credits
  • Projected amount of payroll withholdings and estimated tax payments made to date
  • Determination of whether it is feasible and beneficial to delay the recognition of income into a later year and accelerate deductible expenses into the current year or vice-versa.

Once an estimate of Federal and state tax liabilities is created, we can then create a plan on how to pay those taxes to minimize the amount due with the tax return and any associated penalties and interest.  Whether it is by increasing the tax withheld from a paycheck or making estimated tax payments, projected taxes can be paid before the actual filing of the return.   Here are some things to consider:

1. Take the Required Minimum Distribution (RMD) from your IRA

If you are older than 70 ½ and/or you are the owner of an inherited IRA account, make sure that you have taken your Required Minimum Distribution (RMD) from your IRA or qualified retirement plan for 2014.

2. Review Taxable Gains/Losses from Brokerage Accounts

If you have a taxable brokerage account, review the realized taxable gains/losses for 2014 and evaluate whether it would be beneficial to harvest tax losses. Remember that you may also deduct up to $3,000 in capital losses against your earned income each year. In other words, an ideal situation would be for you to finish the year with a net capital loss of -$3,000 in your investment account. That would mean all of your gains have been negated by losses AND you have an additional $3,000 in capital losses that you can deduct against your earned income.

3. Make financial gifts

Each person is permitted to gift up to $14,000 a year to another individual and not have it count toward your lifetime gift exemption. This $14,000 gift is called the “annual gift tax exclusion amount.” If you are a married couple filing jointly, you may gift up to $28,000 combined to an individual.

4. If you have kids, start a 529 College Savings Account

If you have children in your life whose educational futures you would like to help fund, consider starting a 529 College Savings Account. If you already have one for benefit of your child or grandchild, you may want to consider requesting that relatives make holiday gifts directly to the account or that they gift cash to the child to be deposited into the 529 account.

5. Maximize your Retirement Contributions

Make the most out of your remaining 401(k), 403(b), Simple IRA, etc. contributions by the end of the year. If the plan is sponsored by your employer, all contributions must be made by the end of the calendar year. On the other hand, if the account is a SEP-IRA, Traditional IRA, or Roth IRA, you have until April 15th (or when you file your income taxes, if earlier) to make your contribution.

6. Consider increasing 401(k) contributions for the coming year

Consider increasing your 401(k) contributions in 2015 if you do not already max them out. For 2015, the salary deferral limit will INCREASE, from $17,500 in 2014 to $18,000 in 2015. Additionally, if you are age 50 or older, you may also make a catch-up contribution in the amount of $6,000 bringing your total to $24,000.

7. Research & Enroll in next year’s health insurance plan

Research and enroll in a health insurance plan for 2016 ,either through your employer or individually. If your employer offers the option to do a Flexible Spending Account or Health Savings Account, consider whether those would make sense for you. Different rules apply but both allow you to put pre-tax money into a savings account that can be used for qualified medical expenses. Rules have recently changed for FSA accounts, and participants will now be allowed to carry over up to $500 in unused funds into the next year. For more information on these plans, please see IRS Publication 969.

8. Make charitable donations

For charitable contributions to potentially apply to your 2014 tax return, they need to be submitted by the end of the calendar year.  Make sure that the charity is a qualified 501(c)3 tax-exempt organization that is eligible for tax-deduction of contributions.

9. Do your year end tax planning

Create a folder to hold all of your tax-related documents as they begin to come in so they will all be in one place when you need them.

10. Develop a Budget for Next Year

Consider using financial budgeting software like Quicken or the free to track your expenditures and develop a budget for 2015. These programs allow you to download information from all of your accounts: bank, mortgage, brokerage, IRA, credit card, etc. so that you may categorize the expenses and income for tracking purposes. It can make your life a lot easier come tax time.

For most taxpayers, Dec. 31 is the last day to take actions that will impact their 2016 tax returns. For example, charitable contributions are deductible in the year made. Donations charged to a credit card before the end of 2016 count for the 2016 tax year, even if the bill isn’t paid until 2017. Checks to a charity count for 2016 as long as they are mailed  by the last day of the year.

Taxpayers who are over age 70 ½ are generally required to receive payments from their individual retirement accounts and workplace retirement plans by the end of 2016, though a special rule allows those who reached 70 ½ in 2016 to wait until April 1, 2017 to receive them. Most workplace retirement account contributions should be made by the end of the year, but taxpayers can make 2016 IRA contributions until April 18, 2017. For 2016, the limit for a 401(k) is $18,000. For traditional and Roth IRAs, the limit is $6,500 if age 50 or older and up to $15,500 for a Simple IRA for age 50 or older.

Taxpayers who have moved should tell the US Postal Service, their employers and the IRS. To notify the IRS, mail IRS Form 8822, Change of Address, to the address listed on the form’s instructions. For taxpayers who purchase health insurance through the Health Insurance Marketplace, they should also notify the Marketplace when they move out of the area covered by their current Marketplace plan.

For name changes due to marriage or divorce, notify the Social Security Administration (SSA) so the new name will match IRS and SSA records. Also notify the SSA if a dependent’s name changed.  A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Effective Jan. 1, 2017, any Individual Taxpayer Identification Number (ITIN) not used at least once on a tax return in the past three years will no longer be valid for use on a return. In addition, an ITIN with middle digits 78 or 79 will also expire on Jan. 1. Those with expiring ITINs who need to file a return in 2017 must renew their ITIN. Affected ITIN holders can avoid delays by starting the renewal process now.

Taxpayers should allow seven weeks from Jan. 1, 2017, or the mailing date of the Form W-7, whichever is later, for the IRS to notify them of their ITIN application status - nine to 11 weeks if taxpayers wait to submit Form W-7 during the peak filing season, or send it from overseas. Those who fail to renew before filing a return could face a delayed refund and may be ineligible for some important tax credits. For more information, including answers to frequently-asked questions, visit the ITIN information page on

Keeping copies of tax returns is important as the IRS makes changes to protect taxpayers and authenticate their identity. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income amount from a prior tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign their tax return at Validating Your Electronically Filed Tax Return