Undoubtedly, the national elections will have an impact on personal taxes for years to come. But it is unlikely that a lame-duck Congress will enact changes that will significantly affect tax planning for 2016. Accordingly, here are seven tax moves for individuals to consider at the end of this year.
1. Harvest capital gains or losses. Typically, you might realize capital gains or losses from sales of securities that can offset each other at year-end. The maximum tax rate on net long-term capital gain is only 15% (or 20% for those in the top 39.6% bracket). Conversely, capital losses offset gains plus up to $3,000 of ordinary income in 2016. Note that other tax provisions, including the 3.8% surtax on net investment income, may come into play.
2. Give to charitable causes. Generally, you deduct the full amount of cash or cash-equivalent of gifts made to qualified charitable organizations, as long as you keep the required records. Also, you may deduct the fair market value for gifts of appreciated property if certain requirements are met. However, special limits often apply, including a reduction in deductions for certain high-income taxpayers.
3. Sidestep the AMT. Despite repeated calls to repeal it, this “stealth tax” still traps millions of taxpayers. The alternative minimum tax (AMT) may apply if you have an overabundance of “tax preference items,” especially if you reside in a high-tax state. Have your tax adviser conduct an AMT liability review to determine whether you should shift income items or deductions at year-end.
4. Bunch medical expenses. Under a recent legislative change, the threshold for deducting medical expenses for taxpayers was increased to 10% of adjusted gross income (AGI), although it remains at 7.5% of AGI for taxpayers age 65 or older through 2016. Thus, it may be advantageous to move elective expenses, such as dental cleanings and physical examinations, into this year. Try to bunch medical expenses in the tax year when they will do you the most good.
5. Share income with the family. When appropriate, transfer income-producing property to low-bracket family members. They may benefit from the 0% rate on long-term capital gains for taxpayers in the two lowest ordinary income tax brackets. Caveat: Under the “kiddie tax” for 2016, unearned income above $2,100 received by a dependent child younger than 24 is generally taxed at the parents’ top tax rate.
6. Study college tax breaks. If your child is in college, you may be able to claim either one of two higher education credits, subject to phaseouts at certain income levels. Alternatively, you may claim a tuition-and-fees deduction, also subject to a phaseout. Currently, this deduction is scheduled to expire after 2016. In any event, pay qualified expenses before 2017 to maximize any available tax break.
7. Take required minimum distributions. If you’re older than age 70½, you must take annual required minimum distributions (RMDs) from your qualified plans and IRAs. The penalty for failing to take RMDs is equal to 50% of the required payment. Comply well before the January 1 deadline approaches.