Tax Planning Strategies, 2016 Year-End Tax Planning Series
A number of tax planning strategies should be considered with your year-end analysis. For instance, strategies involving the acceleration of expenses and/or the deferral of income can often provide an immediate cash tax benefit. Additionally, capital gains planning (including capital loss harvesting) and contributions to tax-deferred accounts, such as retirement savings and flexible spending accounts play a role in a successful year-end tax strategy. Testing your current tax posture for the Alternative Minimum Tax (“AMT”) liability should also be an integral part of every year-end review, especially when deciding when to pay any balance due on your state tax liability. Keep in mind that tax reform is very likely in 2017, which may impact the advisability of some of these strategies.
- Prepay January 2017 mortgage in December 2016 maximize 2016 interest deduction.
- Defer recognition of gain on the sales of business and/or investment property through like-kind exchanges and installment sales.
- Use the $14,000 per donee annual gift tax exclusion (Spouses together can gift up to $28,000 per donee) by timing gifts, including front-loading gifts for a qualified college tuition program.
- Cash basis taxpayers can accelerate payment of employee bonuses by year-end to reduce their taxable income. Accrual basis taxpayers can generally defer the payment of non-owner employee bonuses until the fifteenth day of the third month following the taxable year of the accrual.
- Cash basis taxpayers can delay billing to curb revenue received (taxable) toward the end of the year.
- Evaluate outstanding receivables and notes for collectability and potential full or partial write-off.
- Analyze “at-risk” and general tax basis in business entities to ensure the proper tax impact from pass-thru income, losses, credits, and distributions.
- Evaluate the long-term cost-benefit of C-Corp vs. S-Corp vs. LLC structure in light of higher individual income tax rates.
- Review inventory to identify subnormal goods that may be offered for sale below carrying cost. Even if not sold by year-end, the difference between the reduced sales price and the carrying cost may be written off for income tax purposes.
- Pay expenses by credit card to claim deductions without using immediate cash (and earn reward points).
- Analyze passive activities to determine if “active” status can be achieved, and evaluate elections to “group” certain activities for purposes of determining net gains and losses from active and passive activities.
- Evaluate whether tax nexus in a new state or local tax jurisdictions has been established.
- Time charitable contributions, including donations of appreciated securities. Remember to retain important tax acknowledgment letters and secure appraisals if necessary to substantiate deduction.
- Consider the establishment of an IC-DISC to reduce tax on export income.
- Consider funding a Health Savings Account if you meet the eligibility requirements.
- Establish a pension or profit sharing retirement plan for your business by year-end, although funding can occur after year-end.
- Establish a Roth IRA. High net worth taxpayers can benefit from the informally-named “Backdoor Roth IRA” contribution, even if their income exceeds the Roth IRA AGI limitation.
Note that taxpayers in AMT for 2016 may need to modify certain of the aforementioned strategies.