Michele Clark
Clark Hourly Financial Planning - Chesterfield, MO Advisor
1415 Elbridge Payne Road, Suite 255
Chesterfield, MO 63017 USA
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Tax Planning Ideas for Year End 2016

December 20th, 2016

December 31, the window of opportunity for many tax-saving moves closes.  So it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2016 tax year.

Timing is everything

Consider any opportunities you have to defer income to 2017. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2016. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2016 and postponing deductible expenses to 2017. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2017; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2016, prepaying 2017 state and local taxes won’t help your 2016 tax situation, but could hurt your 2017 bottom line.

Special concerns for higher-income individuals

The top marginal tax rate (39.6%) applies if your taxable income exceeds $415,050 in 2016 ($466,950 if married filing jointly, $233,475 if married filing separately, $441,000 if head of household). And if your taxable income places you in the top 39.6% tax bracket, a maximum 20% tax rate on long-term capital gains and qualifying dividends also generally applies (individuals with lower taxable incomes are generally subject to a top rate of 15%).

If your adjusted gross income (AGI) is more than $259,400 ($311,300 if married filing jointly, $155,650 if married filing separately, $285,350 if head of household), your personal and dependency exemptions may be phased out for 2016 and your itemized deductions may be limited. If your AGI is above this threshold, be sure you understand the impact before accelerating or deferring deductible expenses.

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and retirement plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2016 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2016, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2016, you can contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2016 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2016 IRA contributions.

Roth conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions). If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. (Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.)

If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (things don’t go the way you planned and you realize that you would have been better off waiting to convert), you can recharacterize (i.e., “undo”) the conversion. You’ll generally have until October 16, 2017, to recharacterize a 2016 Roth IRA conversion — effectively treating the conversion as if it never happened for federal income tax purposes. You can’t undo an in-plan Roth 401(k) conversion, however.

Changes to note

If you didn’t have qualifying health insurance coverage in 2016, you are generally responsible for the “individual shared responsibility payment” (unless you qualified for an exemption). The maximum individual shared responsibility payment for 2016 increased to 2.5% of household income with a family maximum of $2,085 for 2016, up from 2% of household income for 2015. After 2016, the individual shared responsibility payment will be based on the 2016 dollar amounts, adjusted for inflation.

Since 2013, individuals who itemize deductions on Schedule A of IRS Form 1040 have been able to deduct unreimbursed medical expenses to the extent that the total expenses exceed 10% of AGI. However, a lower 7.5% AGI threshold has applied to those age 65 or older (the lower threshold applied if either you or your spouse turned age 65 before the end of the taxable year). Starting in 2017, the 10% threshold will apply to all individuals, regardless of age. This is something that you may want to factor in if you’re considering accelerating (or delaying) deductible medical expenses.

Expiring provisions

Legislation signed into law in December 2015 retroactively extended a host of popular tax provisions — frequently referred to as “tax extenders” — that had already expired. Many of the tax extender provisions were made permanent, but others were only temporarily extended. The following provisions are among those scheduled to expire at the end of 2016.

  • Above-the-line deduction for qualified higher-education expenses
  • Ability to deduct qualified mortgage insurance premiums as deductible interest on Schedule A of IRS Form 1040
  • Ability to exclude from income amounts resulting from the forgiveness of debt on a qualified principal residence
  • Nonbusiness energy property credit, which allowed individuals to offset some of the cost of energy-efficient qualified home improvements (subject to a $500 lifetime cap)

Talk to a professional

When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.

Article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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2017 IRA and Retirement Plan Limits Announced

November 8th, 2016

The 2017 figures have been announced for IRA and employer plan contribution limits.

IRA contribution limits

  • The maximum amount you can contribute to a traditional IRA or Roth IRA in 2017 is $5,500 (or 100% of your earned income, which ever is less), unchanged from 2016.
  • The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2017, but your total contributions can’t exceed these annual limits.)

Traditional IRA deduction limits for 2017

The income limits for determining the deductibility of traditional IRA contributions in 2017 have increased.

  • If your filing status is single or head of household, you can fully deduct your IRA contribution up to $5,500 in 2017 if your MAGI is $62,000 or less (up from $61,000 in 2016).
  • If you’re married and filing a joint return, you can fully deduct up to $5,500 in 2017 if your MAGI is $99,000 or less (up from $98,000 in 2016).
  • And if you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct up to $5,500 in 2017 if your MAGI is $186,000 or less (up from $184,000 in 2016).
If your 2017 federal income tax filing status is: Your IRA deduction is limited if your MAGI is between: Your deduction is eliminated if your MAGI is:
Single or head of household $62,000 and $72,000 $72,000 or more
Married filing jointly or qualifying widow(er)* $99,000 and $119,000 (combined) $119,000 or more (combined)
Married filing separately $0 and $10,000 $10,000 or more

*If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $186,000 to $196,000, and eliminated if your MAGI exceeds $196,000.

Roth IRA contribution limits for 2017

The income limits for determining how much you can contribute to a Roth IRA have also increased for 2017.

  • If your filing status is single or head of household, you can contribute the full $5,500 to a Roth IRA in 2017 if your MAGI is $118,000 or less (up from $117,000 in 2016).
  • And if you’re married and filing a joint return, you can make a full contribution in 2017 if your MAGI is $186,000 or less (up from $184,000 in 2016). (Again, contributions can’t exceed 100% of your earned income.)
If your 2017 federal income tax filing status is: Your Roth IRA contribution is limited if your MAGI is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $118,000 but less than $133,000 $133,000 or more
Married filing jointly or qualifying widow(er) More than $186,000 but less than $196,000 (combined) $196,000 or more (combined)
Married filing separately More than $0 but less than $10,000 $10,000 or more

Employer retirement plans

  • Most of the significant employer retirement plan limits for 2017 remain unchanged from 2016.
  • The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan in 2017 is $18,000. This limit also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan.
  • If you’re age 50 or older, you can also make catch-up contributions of up to $6,000 to these plans in 2017. [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]
  • If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($18,000 in 2017 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan—a total of $36,000 in 2017 (plus any catch-up contributions).
  • The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2017 is $12,500, and the catch-up limit for those age 50 or older remains at $3,000.
Plan type: Annual dollar limit: Catch-up limit:
401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Plan $18,000 $6,000
SIMPLE plans $12,500 $3,000

Note: Contributions can’t exceed 100% of your income.

  • The maximum amount that can be allocated to your account in a defined contribution plan [for example, a 401(k) plan or profit-sharing plan] in 2017 is $54,000, up from $53,000 in 2016, plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)
  • Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2017 is $270,000 (up from $265,000 in 2016), and the dollar threshold for determining highly compensated employees (when 2017 is the look-back year) is $120,000, unchanged from 2016.

Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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Michele Clark in the News: Learnvest article about Understanding Retirement Planning Benefits of Different IRAs

September 2nd, 2016

I was honored to be quoted recently in the article “Traditional vs. Roth IRAs: Understanding the Retirement Planning Benefits of Each” on Learnvest. It is a good introduction to the differences between the two types of IRA accounts and when you might choose between them.

Some of the differences and rules covered are:

  • Contribution Limits
  • Taxes
  • Income Restrictions
  • Withdrawals

 

I find when planning with families that the decision is a multi-step process. We need to take into consideration all of the vehicles available to them including work and/or self-employment, their potential matching from employers, if they have a spouse and if the spouse is considered an active participant in an employer plan, the quality of their plans, their income phaseout thresholds, and their entire picture of financial goals ranging from short term to long term to determine how much they can afford to put toward all of their goals.  That then informs us what the best vehicle is, or in most cases, vehicles are.

 

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How do I Calculate the Required Minimum Distribution (RMD)?

July 3rd, 2013

FINRA has a Required Minimum Distribution Calculator that you can use to figure out how much your RMD will be. This calculator assumes that if you are married, your spouse is less than 10 years younger that you.  If your spouse is more than 10 years younger than you, then you must use a different withdrawal factor which requires you to pull less out of your IRA each year, thereby making your IRA last longer since your spouse is younger than you are and presumably the IRA will need to provide income for both of you.

What you need to do:

* Gather your IRA and 401(k) statements that show the end of year (December 31st) balances.

* Add the balances together (only per person;  Do not combine the balances of the spouse’s accounts together. If you are married you should have a “spouse 1 balance” and a “spouse 2 balance”.)

* Using the link below to put in your balance and your age at the end of the year, and the calculator will give your RMD figure.

http://apps.finra.org/Calcs/1/RMD

IRS RMD Worksheet

Are you more of the paper and pencil type?  Then this worksheet, from the IRS website, that walks you through the calculation might be your style.  http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf  Use this worksheet unless you have a spouse that is more than 10 years younger than you are.

IRS RMD Tables

Or do you need to use one of the alternative tables because you have an inherited IRA or your spouse is more than 10 years younger than you?  Use this IRS IRA Required Minimum Distribution Worksheet with a link to the tables: http://www.irs.gov/pub/irs-tege/jlls_rmd_worksheet.pdf

Avoid the Penalty

Remember the penalty for not taking your RMD. So be sure to take your required distributions.

Required Minimum Distribution (RMD) blog post series

Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:

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IRA account changes for 2013

November 9th, 2012

The maximum amount that you can put into your IRA is increasing in 2013 from $5,000 to $5,500.  This holds true for Traditional IRAs and Roth IRAs.  The Catch-Up Contribution, for those over 50 years old, will remain the same at $1,000.

Earned income

In order to invest in an IRA you must have earned income.  People ask if they can count income they “earn” from investments, the answer is no.  Earned income is income earned from working.  If your income is less than $5,500 keep in mind you must have earned income to make a contribution , so you can only contribute $5,500 or 100% of earned income whichever is less.  Examples of earned income given on the irs.gov website are:

Earned Income:

  • Wages
  • Salary
  • Tips
  • Union strike benefits
  • Long-term disability benefits received prior to retirement age
  • Net earnings from self-employment

Income that is not Earned Income:

  • Pay received for work while an inmate in a penal institution
  • Interest and dividends
  • Retirement Income
  • Social Security
  • Unemployment benefits
  • Alimony
  • Child Support

Traditional IRA

Everyone with earned income can invest in a Traditional IRA.  However, not everyone can deduct the contribution that they make to a Traditional IRA.  There are IRA deduction phase-out limits for active participants in employer sponsored retirement plans, or if one person in a married couple is an active participant.  The phase-out limits are based on your tax filing status.

The way the phase-out works is you can deduct the full amount when your modified adjusted gross income falls below the low end of the phase-out.  You cannot deduct anything once your modified adjusted gross income hits the high end.  And you can deduct a pro rata portion when it falls in the middle range of the phase-out.

  • Single $59,000 to $69,000
  • Married Filing Jointly (for spouse covered by employer retirement plan) $95,000 to $115,000
  • Married Filing Jointly (for spouse that is not covered by employer retirement plan, but married to a covered spouse) $178,000 and $188,000

Roth IRA

Not everyone can make a Roth IRA contribution.  In order to make the full contribution your modified adjusted gross income must be below the phase-out threshold.  If your modified adjusted gross income hits the top of the phase-out range you cannot make a contribution at all.  If your modified adjusted gross income falls in the middle of the phase-out range you can make a pro rata contribution.

  • Single $112,000 to $127,000
  • Married Filing Joint $178,000 to $188,000

Many people have automatic investing set up so that they put a little each month into their IRA accounts.  If you do this, be sure to make the adjustment to increase the amount you are putting into your IRA account, you can put another $41.66 a month away in 2013.  Every little bit helps!

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