Professional Tax Services, Inc.

Tax services, consulting & IRS representation

Tax Advice for Year-End 2016

Posted on | December 27, 2011 | No Comments

Each and every one of you has a different financial situation, so giving generic tax advice is difficult.  But here are some basic things to consider if you are in a position to invest, have a business or simply want to try to reduce your overall tax burden.

There are essentially three things you can do to help reduce your tax burden.

  1. First, have tax free income.  This would entail putting as much money into tax free CD’s or bonds as you can.  The mere investment in such instruments would not, in itself, provide any tax savings, but income from them would be tax free.  This is a strategy used by the very wealthy but could be effective if you have the money to invest in such instruments and are willing, at least for now, to accept a relatively low rate of return.
  2. Second, take advantage of existing tax deductions and credits allowed in the tax code.  You should be familiar with the deductions and credits you qualify for and take full advantage of them when you file.  Credits can be very advantageous as they are a one-for-one reduction of the income tax you owe, but deductions are valuable as well.
    1. Taking allowable deductions on your Schedule A is important.  You use Schedule A when your allowable expenses exceed the standard deduction.  This generally means you must own a home.  If you don’t already own a home, you should consider doing so, especially in this extremely good buying environment.  Owning a home allows you to deduct mortgage interest and real estate taxes on Schedule A which in turn allows you to deduct contributions, state sales tax, and medical expenses, if they exceed the threshold.  You can also deduct investment expenses and certain non-reimbursed employee expenses.
    2. There are a number of other deductions and credits available to you that you should be aware of.  Some are familiar, like the Child tax credit, but there are many more credits and deductions such as education credit, student loan interest, credit for child and dependent care; the list goes on.  Your tax professional can help you understand the credits and deductions available to you.
  3. Finally, the third way to reduce taxes is to defer income to future years.  This is done by contributing to retirement plans and other tax deferring vehicles.  Take advantage of any retirement plan available to you where you work by contributing as much as you can.  If you cannot contribute the maximum, contribute enough to qualify for the employer matching.  If you are self-employed, set up a retirement plan in your business.  Except for ROTH IRA’s, money you contribute to a retirement plan is not taxable in the current year and therefore reduces your taxable income.  The same holds true for contributions to and HSA and an IRA and other vehicles. Contributing before tax money to these plans means you don’t pay taxes on that money in the current year, however, as a general rule you do pay tax when you withdraw the money in a later year.

For those of you who are business owners, there are a number of strategies that you should consider to keep your taxes as low as possible.

Keeping excellent business records and selecting the right business entity can make a tremendous difference in your business taxes.  Good record keeping means you won’t miss those expenses you took during the year.  Having the right business entity can make a difference in the taxes you pay and provide other non-tax advantages.  If you have a business, I strongly advise consulting with a tax professional.

One of my jobs as a tax professional is to keep up with changes in the tax code that affect my clients.  Since 2016 is a presidential election year, I know 2017 will be a very interesting to watch.  Who knows what the future will bring.  Regardless of politics, however, here are some things you should know.

  1. Given the results of the recent 2016 election, tax cuts may be in your future.  They will be enacted upon in early 2017.
  2. There were a number of new taxes in the Patient Protection and Affordable Care Act (ObamaCare).  Changes to Obamacare are coming, if not outright repeal.  There were a number of new penalties (taxes) associated with that law that may go away or change, such as:
    1. Increased Medicare tax for those families with income greater than $250K
    2. Increased Medicare tax (3.8%) imposed on other income sources, not just your wages
    3. For those who can take medical deductions on Schedule A, the threshold will increase to 10%, rather than the current 7 ½%.  All the more reason to have a HSA.
    4. You will no longer be able to pay for over-the-counter medications through your HSA, MSA or flexible spending account
    5. An increasing penalty for those who do not have medical insurance for part or all the tax year.

Finally, here are a few strategies to consider as 2016 approaches:

  1. If you are an employee who routinely gets a sizable refund each year, consider increasing the number of dependents you claim on your W-4.  This will increase the amount of money you receive in your paycheck and reduce the interest free loan you are giving the government each year.
  2. Don’t get blindsided with taxes in April or later.  Know what you will owe and make sure you set enough aside to cover those taxes.  Unusual circumstances can lead to big surprises come tax time.  Examples include:
    1. An early distribution from an IRA
    2. Receipt of unemployment compensation with no tax withholding
    3. Sale of appreciated property or investments
    4. Foreclosure of a home or forgiveness of debt
    5. Review your portfolio.  If you have substantial gains, consider selling some of your losers to offset the gains.
    6. If you own a business and need capital equipment, consider buying and using Code Section 179 depreciation to take the full cost in the year of purchase.
    7. Start a Medical Savings or Health Savings Account if you don’t already have one and fully fund it.  This allows you to pay for out-of-pocket health expense with pre-tax dollars.
    8. If you don’t have a retirement plan at work, set up and contribute to an IRA.
    9. Consider restructuring your business.  The type of business entity you have can have both tax and non-tax consequences.  The best time to do this is on Jan 1.
    10. Finally, don’t forget those charitable donations.  Remember, any donation over $250 requires acknowledgement from the non-profit organization.

Have a prosperous New Year.

Bill Bradfield, EA

206-295-2291

http://www.professionaltaxservicesinc.net/

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As an Enrolled Agent and consummate tax professional, Bill provides year-round, affordable tax services for his clients. Bill is experienced in small business start-up and tax planning in addition to a full range of tax return preparation.

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