Making Cents: Year End Tax Moves To Consider
By: John P. Napolitano, CFP®, CPA, PFS, MST
In a famous tax court case from 1934, Judge Learned Hand spouted what is now a famous quote amongst us tax nerds. Justice Hand said that “any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes”.
Here we are 82 years later, and most would still agree with this quote regardless of your political persuasion.
As this quote relates to your 2016 tax return, it is possible that this tax year is more meaningful than we would have imagined 11 months ago. While speculation is not always a good idea, if you think that income tax rates may be lower as a new administration takes hold, then reducing your income or maximizing your deductions in 2016 may be the right move.
Under that scenario, it may be wise for top tax bracket earners to defer as much income as possible into 2017. There is no guarantee that rates will come down and that you’ll save in taxes, but there is likely to be no harm in trying. The worst case is that you pay the same rate next year, but at least you’ve deferred that tax obligation into the following tax year.
Maximize any remaining retirement contributions. Deducting retirement contributions in your highest tax bracket years and then to pull it out at a future lower rate is ideal. This may be most meaningful for self-employed persons and business owners who can control the type of retirement plan offered by the business.
Consider paying bills that may qualify for a deduction in 2016 before the year ends. For taxpayers who are employees of a company that they do not own, this may mean bunching any medical expenses to get the benefit of a deduction or timing other deductible payments to gain the benefit in 2016. But before you write checks and hope that they’re deductible, work with a qualified CPA to be sure that you aren’t going to have those deductions limited or reduced because of the alternative minimum tax or phase out’s due to income thresholds.
For business owners, you should consider discussing with your CPA if you can place certain property and equipment in place prior to 12/31 and become eligible to write off up to $500,000 of those qualified purchases. The key here is to place the property into service before year end, which means a lot more than simply writing a check. The equipment would need to be in service which means able to be put into use by 12/31. Your CPA will be able to discuss if this option is best for your situation.
Take a close look at your investment statements. Are there any gain or loss harvesting that would help you? This could be extremely valuable for those showing large gains with taxable income that places you in the highest bracket to include paying the Obama Care surtax on investment income.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. LPL Financial does not provide tax advice or services. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.