2016 Year-end Tax Tips

By Greer Gibson Bacon, CFP®
The year is quickly coming to a close.  But, there’s still time to save on 2016 income taxes.  Here are five simple tips.  
Employer-sponsored retirement plans.  In 2016, you can contribute up to $18,000 of compensation plus an extra $6,000 if you’re 50 or older by year-end1.  If you’re not on target to meet your savings goal, your employer may allow you to boost contributions from now until year-end.  
If you’re an owner-employee, you may be able to contribute up to $35,500 more.  Talk to your plan administrator about maximizing employer contributions, like matching or profit sharing contributions.  
Get the best bang for your buck.  Traditional contributions save taxes now.  So, if you’re in a high bracket, you might favor them.  Roth contributions save taxes later. So, if you’re in a low bracket, you might favor them.  Today, many plans allow participants to re-characterize contributions from traditional to Roth contributions (vice versa) or convert balances.  
Health Savings Account (HSA).  In 2016, you and your employer together can contribute up to $3,350 to an individual HSA or $6,750 to a family HSA if you’re enrolled in a high deductible health plan (HDHP).  You can contribute an extra $1,000 if you’re 55 or older by year-end.  The 2016 contribution deadline is April 15, 2017.  
HSA’s are great savings vehicles.  Employer contributions are tax-free and yours are tax-deductible.  Earnings accumulate and may be withdrawn tax-free to pay qualified medical expenses.  But, you can grow your HSA for retirement if you cover them from your take-home pay.  Many offer a good selection of mutual funds.  
By contrast, if you’ve got a Flexible Spending Account (FSA), spend it before year-end or the plan’s grace date.  Otherwise, you’ll forfeit the balance.  If you’re not sure what you’ve got, call Human Resources.  
Taxable portfolios.  “Harvest” capital losses before year-end.  This year, you can use them to offset realized gains dollar-for-dollar, then up to $3,000 of ordinary income.  Residual losses can be carried forward to 2017.  A word of caution … your losses will be disallowed if you buy or sell a substantially identical security within 30 days of the sale.  
If you plan to make charitable contributions before year-end, gift an appreciated asset.  You can deduct its full fair market value as an itemized deduction (subject to some limitation).  Unlike you, the charity will pay no tax when it sells the asset.  Use the cash you would otherwise have gifted to improve the quality and diversification of your portfolio.  
Required minimum distributions (RMDs).  If you’re required to take a 2016 minimum distribution from IRAs and employer-sponsored retirement plans, do it before year-end.  Otherwise, you’ll pay a 50% excise tax on the amount you failed to withdraw in addition to ordinary tax.  
There are other ways to save on 2016 income taxes, too.  If you have questions or need assistance, we recommend contacting your financial or tax advisor.  Then, start planning for 2017!
1SIMPLE IRA and Traditional or Roth IRA contribution limits are lower.

This article first appeared in the November 2016 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.


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