Year-End Tax Strategy: Do You Have One?


Year-End is Just Around the Corner, Do You Have a Year-End Tax Strategy?

Do you have a year-end tax strategy? Year-end and the holidays are just around the corner. It is time to think about what you can do at the last-minute to improve your tax situation. Year-end tax planning is probably something you will want to deal with before the holiday season crush. Here are some tax tips and a year-end tax strategy to help you.

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There are numerous steps that you can take before January 1 to save a considerable amount of tax money. Not all actions recommended in this article will apply to your particular situation, but you will benefit from many of them.

Maximize Education Tax Credits

Do you qualify for the American Opportunity or Lifetime Learning education credits? Check to see how much you have paid in qualified tuition and related expenses in 2016. You may ask yourself, what if it is not the maximum allowed for computing the credits? You can prepay 2017 tuition as long as it is for an academic period beginning in the first three months of 2017. That will allow you to increase the credit for 2016. This technique is especially helpful when a student has just started college in the fall.

Roth IRA Conversions

Is your income is unusually low this year? Consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, provides you an opportunity to convert to a Roth IRA at a lower tax amount.

The Roth IRA plan also allows up to $5,500 (or $6,500 for individuals age 50 and over) of contributions each year. Like the Traditional IRA, the amount that can be contributed phases out for higher-income taxpayers. Unlike the Traditional IRA, these amounts phase out even for those who do not have an employer-related retirement plan. Read about other retirement options in “Be Careful Not to Ignore Your Retirement Options” Part 1 and Part 2.

Don’t Forget Your Minimum Required Distribution

Are you are over 70.5 years of age? Did you take your 2016 required minimum distribution from your IRA or qualified retirement plan? If not, you should do that before December 31 to avoid possible penalties. If you turned 70.5 this year, you may delay your 2016 distribution until the first quarter of 2017, but that will mean a double distribution in 2017 that will be taxed.

Advance Charitable Deductions

Another good year end strategy is charitable donations. This is a win-win-win tax strategy if you ask me. The charitable organization wins because they help people. Those who are helped win. And, of course you win because you get a tax deduction. But even better than that you get the chance to do something good.

If you regularly tithe to a church or other house of worship? What about making pledges to other qualified charities? Consider pre-paying part or all of your 2017 tithing or pledge. This advances the deduction into 2016. This can be especially helpful to individuals who marginally itemize their deductions. It allows them to itemize in one year and then take the standard deduction in the next. If you are age 70.5 or over, you can also take advantage of a direct IRA-to-charity transfer, which will count toward your RMD and may even reduce the taxes on your Social Security income.

Maximize Health Savings Account Contributions

Will you be eligible to make health savings account (HSA) contributions late this year? You can make a full year’s worth of deductible HSA contributions. This is even if you were not eligible to make HSA contributions earlier in the year. This opportunity applies even if you first become eligible in December.

Prepay Taxes

Both state income and property taxes are deductible. This is only true when you itemize your deductions and you are not subject to the AMT (Alternative Minimum Tax). Prepaying them advances the deductions onto your 2016 return.

Do You Expect to Owe State Income Tax?

It may be appropriate to increase your state withholding tax at your place of employment. Or you can make an estimated tax payment before the close of 2016. Another thought is If you pay your real property taxes in installments, pay the next installment before year-end.

Pay Tax-Deductible Medical Expenses

If you have outstanding medical or dental bills, paying the balance before year-end. This may benefit you, but only if you already meet the 10% of AGI floor for deducting medical expenses. Another opportunity is if adding the payments would put you over the 10% threshold. You can even use a credit card to pay the expenses. Keep in mind, if you can’t pay off the full balance on the card right away, do this only if it is worth it. In other words, will the interest expense on the credit card be less than the tax savings? Also, consider scheduling and paying for medical expenses such as glasses, dental work, etc., before the end of the year. See the “Seniors Beware” article if you or your spouse is age 65 and over.

Take Advantage of the Annual Gift Tax Exemption

You can give $14,000 per person, to an unlimited number of individuals without paying gift tax each year. However, you can’t carry over unused amounts from one year to the next. (The gifts are not tax deductible.)

Avoid Underpayment Penalties

Do you believe you will owe taxes for 2016? You can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year. Therefore, increasing withholding at the end of the year can reduce the penalties for the earlier quarters.

What Else Do I need to know for a year-end tax strategy?

There are additional factors to consider for a number of the strategies suggested above. I encourage you to contact this office before you act on any advice given. This is to ensure that you will benefit given your specific tax issue. Call Alex Franch, BS EA at 781.849.7200 for assistance in planning your real-estate transactions. Worthtax has locations in Quincy, Weymouth and Dedham. Alex is an IRS accredited tax adviser for Worthtax. He can help you with your tax preparation needs.

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.

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