Money Maven: Year-End Tax Planning Can Save Money

 

By Sheryl Rowling

SAN DIEGO — Q:  Can you please tell me how I can lower my 2016 tax bill before it’s too late?

A:        I’ll try.  By planning before January 1^st, you might be able to reduce your 2016 tax bill and plan ahead for 2017.  Your tax planning will need to address the following key areas: retirement contributions, income, deductions, investment planning, business deductions, and tax credits.  Before I discuss the finer details, let’s look at the basic starting points:

Many aspects of your income tax liability are impacted by adjusted gross income (AGI).  AGI can affect your IRA options as well as certain deductions like medical expenses and miscellaneous itemized deductions. Therefore, you should start the planning process by estimating both your 2016 and 2017 AGI.

You will also need to consider your “tax bracket” – the rate at which your last dollar of income is taxed. The tax rates for 2016 are 10%, 15%, 25%, 28%, 33%, and 35%. There are also additional taxes imposed if your compensation or investment income exceed certain limits. If your income has increased, you may be pushed into a higher bracket. If so, your potential benefit from tax-saving opportunities is increased (as is the cost of overlooking that opportunity).

In general, if your 2016 tax bracket will be greater than or equal to your 2017 tax bracket, you will want to lower your AGI and increase your deductible expenses in 2016.  This can be accomplished by making deductible retirement contributions, deferring taxable income and accelerating tax deductions.

Q:        How can retirement savings affect my tax liability?

A:        By making a tax deductible retirement contribution, you may be able to lower your tax bill. In general, if you can afford to set aside the cash, you should try to make the largest retirement contributions allowable.  There are many tax-saving opportunities for retirement savings including Traditional IRAs, 401(k) plans and Roth IRAs. Here are the specifics:

            Traditional IRAs:  Individuals who are not covered by an employer pension plan may make deductible contributions to an IRA. Depending on AGI, an individual who is covered by a plan may also be allowed to make deductible contributions to an IRA. The 2016 deductible IRA contribution limit is $5,500 per person.  Also, taxpayers who are age 50 or older can deduct an additional $1,000 “catch-up” contribution.  Thus, the total deductible limit for these individuals may be as high as $6,500.

            401(k) Plans:  The 401(k) contribution limit is $18,000 for 2016. If your 401(k) plan allows catch-up contributions and you will be age 50 by December 31, 2016, you may contribute an additional $6,000 to your 401(k) account, for a total maximum contribution of $24,000 ($18,000 in regular contributions plus $6,000 in catch-up contributions).

            Roth IRA:  Contributions to a Roth IRA are not deductible. Although a Roth IRA will not lower your current tax bill, it may lower future tax bills in much greater amounts. Why? Because Roth IRA earnings grow tax-free and distributions are tax-free (provided no distributions are made within 5 years and the individual has reached age 59-1/2). When not exceeding certain AGI limitations, the 2016 maximum contribution is $5,500. Like the Traditional IRA, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older, making the total Roth IRA limit $6,500 for these individuals.

Note to Readers:  Be sure to check out my next column for more tax planning ideas!

*
Rowling  is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com.