Countdown to 2017…What is your year-end tax planning strategy?

December 19, 2016 – As the year comes to a close, there are three important items that should be considered regarding your year-end personal tax planning strategies.

  • The Minimum Distribution Requirement: This applies to people who turned age 70½ within the last year or who are already above that age limit. The IRS requires participants in IRAs, SEP IRAs, Simple IRAs, 401k plans, 403b plans, 457b plans, profit sharing plans, and other defined contribution plans to take annual payments beginning in the year they turn age 70½. These payments are normally due by the end of the year; however, in the initial year that minimum distributions are required, the payment can be made by April of the following year. In fact, waiting to make that first payment until April of the following year is advisable due to potentially lower tax rates in 2017. It is important to understand these deadlines in order to avoid a penalty of up to 50% of the amount required.

For individuals who find that they might not need the money which they are required to take, there is an option to transfer the money directly from the IRA account to a charity of their choice. This will count as the required minimum distribution and will not be taxed as taxable income. However, it is important to note that if this method is used, the charitable donation cannot be deducted on the individual’s tax return.

  • Roth IRA Conversion: Converting traditional IRAs into Roth IRAs is normally a good strategy to use if an individual believes they will be in a higher tax bracket next year or in future years. However, if the Trump administration is able to implement plans for major tax reform in 2017, it may be beneficial to keep funds in the traditional IRA for the remainder of 2016. A lower tax bracket in 2017 would allow individuals to convert into the Roth IRAs and pay tax at the new lower rate.
  • Medical Expense Deductions: Currently, medical expenses that exceed 10% of AGI for people under the age of 65 can be deducted. If an individual is age 65 or older, they are able to deduct any medical expenses that exceed 7.5% of AGI. However, beginning in 2017, all individuals will be held to the 10% threshold. This might mean that individuals who have reached the 7.5% limit in 2016 may want to accelerate certain medical expenses, such as elective procedures, into 2016 in order to take advantage of the lower threshold.

As the year end quickly approaches, be sure to appropriately plan your year end tax planning strategy to ensure you get the greatest benefit. While it is not certain that the Trump administration will be successful in  implementing  tax reform in time to affect the 2017 tax year, it is still wise to consider this potential. Opportunities to save tax based on potentially lower tax rates include, but are not limited to

  • Deferring Income into 2017
  • Accelerating Deductions into 2016
  • Selling Property in 2017 (or use an installment sale if sold recently)
  • Converting to Roth IRA in 2017

There are many other ways in which an individual can ensure they get the most out of their tax savings strategy. If you have any questions regarding the above information, or would like formal tax advice, please contact your Dopkins Tax Advisor.

 

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Dopkins Tax Advisory Group

Our more than 25 tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Robert Pollock, CPA at rpollock@dopkins.com.