Adjust Withholding, Maximize Retirement Contributions, and More 2016 Year-End Tax Strategies for Individuals

The end of the year is an important time for taxpayers to review income and deductions for the tax year. Below are some important tax planning strategies to lower your individual tax burden.

Accelerate Deductions and Defer Income

There are many income items and expenses you can control. If you expect your 2017 income and tax bracket to be lower, ask your employer if they can pay your bonus in January instead of December. On the deduction side, you may be able to accelerate real estate taxes, or state and local taxes if you expect your tax bracket to be higher this year.

Take Advantage of Capital Losses

Individuals can deduct up to $3,000 of capital losses exceeding capital gains. Cashing out stocks with a built-in loss is an easy way of offsetting capital gains, or providing up to $3,000 of losses against ordinary income.

Adjust Withholding

Adjust your tax withholding on your salary or bonuses now. Withholding is treated as being paid ratably throughout the year, while large estimated payments at year end may expose you to penalties for previous quarters.

Maximize Retirement Plan Contributions

Retirement accounts offer some of the best tax savings, so maximize your contributions if possible. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an Individual Retirement Account. If you are over the age of 50, you are allowed a catch-up contribution of $6,000 for an employer-sponsored 401(k), and $1,000 for an IRA.

Convert to a Roth IRA

If your income is down in 2016, or you are hoping it will increase in later years, now may be a great time to convert your traditional IRA to a Roth IRA. This conversion allows you to pay tax now, when you are in a lower tax bracket, in exchange for no taxes in the future.

Open a Health Savings Account

Health Savings Accounts (HSAs) allow owners to pay for health expenses and are growing as a retirement saving tool. Contributions are deductible, or if made through a payroll deduction, the contributions are made pre-tax. Contribution limits for individuals are $3,350, $6,750 for families, and a catch-up contribution of $1,000 is allowed for ages 55 and over.

Please keep in mind that deductions may be subject to income limitations and deduction floors.  Should the alternative minimum tax “AMT” rules come into play, any benefit may be substantially reduced or negated. I encourage you to contact an Anders advisor to discuss year-end planning.

Learn how to prepare year-end tax planning strategies for your business.