Make the Most of Education Tax Credits
Both the Lifetime Learning education credit and the American Opportunity credit allow qualified taxpayers to prepay any 2017 tuition bills for an academic period that begins by the end of March. That means that if you are eligible to take the credit and you have not yet reached the 2016 maximum for qualified tuition and related expenses paid, you can bump up your credits by paying for early 2017 now. This may not apply to you if you’ve been paying tuition expenses for the entire 2016 tax year, but if your student just started school this fall, it will probably provide you with some additional help.
Convert into a Roth IRA
By converting a traditional IRA into a Roth IRA, taxpayers whose incomes have been very low in 2016 may be able to move the assets currently in their traditional IRA into a Roth IRA at a much lower tax rate.
Avoid the Minimum Required Distribution Penalties
Once American taxpayers reach the age of 70.5, they are required to take what is known as a “required minimum distribution” from their qualified retirement plan or IRA every year. If this is the first year that this rule applies to you and you haven’t taken your money out yet, there’s no need to panic – you don’t have to do so until sometime during the first quarter of next year.
Of course, if you wait until 2017 to take your 2016 distribution, you’re going to end up having to take two distributions in one year – one for 2016 and one for 2017. For those who have fallen into this category before 2016, you only have until December 31st to do so if you want to avoid penalties.
Many people who itemize take advantage of the ability to take a deduction for their donation to their favorite charity or house of worship. Did you know that you can choose to pay all or part of your 2017 planned giving in 2017 in order to increase the amount you deduct in 2016? Though this may not be appealing to those who itemize every year, if you alternate between taking the standard deduction one year and itemizing the next, this can give you a big boost.
Additionally, those who are required to take a “required minimum distribution” from their IRA because they are 70.5 or older are able to direct their RMD directly to the charity and get the additional benefit of cutting the amount of taxable Social Security income they need to pay on.
Optimize your Contributions to your Health Savings Account
Did you become eligible to make contributions into a Health Savings Account this year? If so, then you can make deductible contributions into that account up to its maximum amount no matter when you became eligible.
Prepay State and Property Taxes for 2017
You probably know that if you are not subject to the AMT and you itemize your deductions, you are eligible to deduct both your property taxes and your state income tax. But did you know that you can increase the amount that you deduct on your 2016 taxes by prepaying some of 2017?
You can ask your employer to boost the amount of your state withholding by a reasonable amount, or if you are self-employed pay your 4th quarter estimate due in January in December and increase your deduction. Same is true for your real estate taxes: if you pay your first 2017 installment in 2016, you can take it as part of your deduction.
Pay Outstanding Medical or Dental Bills
Taxpayers are able to deduct qualified medical and dental expenses that exceed 10% of their adjusted gross income, and if you have reached that threshold or are close, then it may make sense for you to pay off any of those types of bills that are still outstanding rather than paying them over time. If you are near or above the limit, it may also make sense to look at what your expenses will be for the next year and move those that you can into 2016 in order to increase the deduction. These expenses could include dental work or eyeglasses.
Two additional important issues: first, if either you or your spouse is over the age of 65 the adjusted gross limit for you is 7.5% in 2016 (goes to 10% in 2017). Second, if you are thinking of doing this by paying for them using a credit card and you’re not going to pay the balance immediately, make sure that you’re not paying more in interest then you’re saving with the increased deduction.
Remember the Annual Gift Tax Exemption
One of the best ways to reduce your taxes and at the same time give to those you love is to take advantage of the annual gift tax exemption. Though the gifts are not tax deductible, for tax year 2016 you are able to give $14,000 each to as many people as you want without having to pay the gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $14,000 over into 2017.
Check The Payments You’ve Made to Date
If you think there’s a chance that the taxes you’ve paid year to date for 2016 are insufficient, it’s a good idea to increase your withholding in the time that’s left to make up for it. Underpaying taxes makes you vulnerable to an underpayment penalty that is assessed quarterly. The good news is that even if you have underpaid for any or all of the first three quarters of the year and owe money, if you make up for it by boosting your year-end withholding, since federal withholding is deemed paid ratably throughout the year. Plus increased withholding and possible payment of estimated taxes can also reduce the fourth quarter underpayment penalty.
Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself into the tax-advantaged position is to seek advice from our experienced, qualified tax professionals.