Tax Breaks

6 Year-End 2016 Tax Planning Tips and Reminders

Tax Planning Tips and RemindersDon’t let the year slip away without doing a little tax planning – the financial benefits will be worth your time. All of the below tips and reminders must be done by December 31, or you either forfeit the opportunity or pay penalties.

1. Max Out Qualified Plan Contributions

If your cash flow can stand it and you haven’t maxed out your 401(k) or 403(b) yet, talk to your payroll department to increase your contribution before December 31st.

For those under 50, the maximum contribution is $18,000, and for those over 50, the maximum contribution is $24,000. At the very least, be sure you’ve contributed up to any employer match.

2. Take Minimum Required Distributions (MRD’s) from Inherited IRA’s

If you have inherited an IRA from someone other than your spouse, you must take minimum required distributions beginning the year after the death of the original owner and by December 31st of that year.

To calculate the MRD, the IRS has a Single Life Expectancy table you can find by searching the IRS website. Or, Schwab and Fidelity and other custodians have on-line calculators to help you with the calculation. Be sure to have on hand the date of death and birthdate for the original owner and the balance of the account on December 31 of the previous year.

3. Take Required Minimum Distributions RMD’s from your Retirement Accounts.

As an owner of a traditional IRA, SEP, Simple IRA or company retired plan (401(k), 403(b) or 457 plan, you must start receiving distributions by April 1 of the year following the year in which you reach age 70½. You figure your required minimum distribution for each year by dividing the account balance of December 31 of the preceding year by the applicable life expectancy. Life expectancy tables are located on the IRS website. You must calculate the RMD separately for each IRA that you own, but you can withdraw the total amount from one or more of the IRAs.

Similarly, a 403(b) owner must calculate the RMD separately for each 403(b) contract that he or she owns but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.

If you don’t need the money and want to avoid tax, some or all of your required RMD can be donated directly to a charity. The donation counts as your required minimum distribution but doesn’t increase your adjusted gross income, which can be beneficial if you don’t itemize and can’t deduct charitable contributions.

Also, keeping some or all of your RMD out of your adjusted gross income could help you avoid the Medicare high-income surcharge or make less of your Social Security income taxable.  The money needs to be transferred directly from the IRA to the charity to be tax-free.

If you withdraw it from the IRA first and then give it to the charity, you can deduct the gift as a charitable contribution (if you itemize), but the withdrawal will be included in your adjusted gross income.

4. Roth IRA Conversions

If you have a traditional IRA, you might want to consider converting some or all of the balance to a Roth IRA. Roth IRA’s are a valuable tax-planning tool due to the favorable tax status once the money is inside the Roth IRA.

If all the rules are followed, you may never pay tax on your Roth balance and your heirs may not either. However, tax is due when you convert an IRA to a Roth, so the conversion makes sense if your income is lower than usual or you believe that your tax rate will be higher in future years. For example, if your income dropped in 2016 due to a job change, you might consider converting some of your IRA to a Roth because you will be in a lower tax bracket and pay fewer taxes than you might in future years. Be sure and take note that under Trump’s new tax plan, your tax rate maybe lower next year.

The deadline for conversions is December 31, 2016, but you will want to do this by at least December 22nd to make sure the paperwork gets processed with your custodian.

5. Establishing a New Qualified Retirement Plan

If you are self-employed and want to establish a qualified plan such as a 401(k), money purchase, profit-sharing or defined benefit plan, it must be set up by December 31st. Many people confuse this deadline with the SEP IRA deadline that can go into the next year, including extensions.

You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that came into existence after October 1 of the year, you can establish the SIMPLE IRA plan as soon as administratively feasible after your business came into existence.

6. Review Your Charitable Contributions

If you itemize deductions and are charitably minded, you will want to donate what you plan to before December 31st. You may deduct an amount up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. Good to know: donations made by check are considered delivered on the day you mailed it.

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10 Family and Individual Tax Breaks You Should Know About

Protecting Americans from Tax Hikes Act of 2015Given the timing (right in the midst of the holiday season), you might have missed hearing about some favorable last-minute tax legislation (also known as the Protecting Americans from Tax Hikes Act of 2015), that will benefit your wallet. There is a little something for everyone and best of all, it makes some of the long-favored tax breaks permanent or extended beyond one year.

Tax Breaks for Seniors

IRA Qualified Charitable Deductions (QCDs)

For 2006-2014, IRA owners age 70 1/2 and over could make tax-free charitable contributions up to $100,000 directly out of their IRAs. These deductions counted as Required Minimum Distributions (RMDs). Charitably minded seniors, who could afford to forgo the RMD cash, could cut their income tax bills by making tax-free QCD’s in place of taxable RMDs. The new tax legislation makes this break permanent and available for QCDs in tax years 2015 and beyond.

Tax Breaks for Parents and Students

American Opportunity Tax Credit (AOTC)

The AOTC is a partially refundable credit of $2500 for tuition and related fees for undergraduate education. It phases out for AGI starting at $80,000 (if single) and $160,000 (if married filing jointly). This break was set to expire in 2017 and is now permanent.

Qualified Tuition Deduction

This write-off, which can be as much as $4000 or $2000 for higher-income taxpayers, expired at the end of 2014. It is now retroactively extended through 2016.

Additional Uses For Tax-Preferred Distributions From 529 Accounts

In addition to the previously allowed expenses of tuition and fees, qualified room and board, and textbooks, 529 accounts can now be tapped for computer equipment, software and even internet access costs.

Tax Breaks for Teachers

$250.00 Deduction for K-12 Educators

With this deduction, teachers could deduct from income up to $250 worth of school-related expenses whether they itemized or not. The break expired in 2014, but the new legislation makes this deduction not only permanent but retroactive to 2015.

Tax Breaks for People with Little or No State tax (or really big spenders)

Deduction of State and Local General Sales Taxes

For the last few years people who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local sales taxes. This option expired at the end of 2014 but is permanent starting with the tax year 2015.

Tax Breaks for the Environmentally Conscious

Credits for Qualified Solar Electric and Water Heating Property

Extended through 2021: The 30% credit for qualified solar water heating property and solar electric property expenditures was scheduled to expire for property placed in service after 2016. Now this credit is extended and phased down through 2021.

$500 Energy-Efficient Home Improvement Credit

In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible for energy-efficient insulation, windows, doors, and roof, plus 100% of eligible costs for energy-efficient heating and cooling equipment up to a $500 lifetime cap. This break expired at the end of 2014 but now is retroactively extended through 2017.

Tax Breaks for Commuters

Parity for Employer-provided Transit and Parking Benefits

The Act retroactively restores and makes permanent the parity provision that required the tax exclusion for transit benefits to be the same as the exclusion for parking benefits. Thus, for 2015, employees can receive tax-free transit benefits of up to $250 a month – the same as for tax-free parking benefits.

Tax Breaks for Short-Sellers

Tax-Free Treatment for Forgiven Principal Residence Mortgage Debt

The Feds count a forgiven debt as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to up to $2 million of COD income from mortgage debt used to acquire a principal residence and cancelled between 2007 and 2014. The Act retroactively extends this break to cover eligible debt cancellations that occur before 2017 (or are under a written agreement entered into before 2017).

Do you want to manage your money (and life!) better?

The Happiness SpreadsheetIf you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

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