The Most Wonderful Tax Advantages of the Year

While all three of my girls love this time of year, it is my Phoebe who truly exudes the Christmas spirit. Every year after Thanksgiving, Phoebe decorates her room with lights, ornaments, stuffed Santas, holly, mistletoe . . . it’s like walking into a winter wonderland. In fact, this year Phoebe has a big handmade sign hanging over her mirror that reads, “O.C.D., or Obsessive Christmas Disorder.” Oh, that’s my Phoebe!
I love Christmas, too. I really do. I just love everything about it, starting with the true meaning of Christmas: from the celebration of the Nativity of Christ to our family traditions—decorating the tree, hanging the stockings, reviewing our tax strategy and visiting with family. Now, throw a little “adult” eggnog in there, and I am good to go.
That’s right . . . tax strategy. Folks, this is often the best time of year for you to make sure that you are taking advantage of any tax-saving strategies available to you.
Admittedly, future tax policy is somewhat unknown. President-elect Trump has one plan and House Speaker Paul Ryan has another. And although those two haven’t yet agreed on much, especially in the past year, both plans have some major similarities. So, we can prepare for what we do know and what we can expect.
Both proposed plans aimed to cut taxes and simplify the income brackets. Specifically, both want to cut the number of brackets down to three, which is less than half as many as the seven that are currently in place. Both plans also include shedding the 3.8 percent Medicare tax for higher earners, as well as the gift and estate taxes that plague many wealthy individuals.
In both Trump’s and Ryan’s plans, the tax rate cuts are balanced (at least in theory) by limiting deductions, but each in their own way. Ryan would like to keep the mortgage interest and charitable gifts deductions, but eliminate all others. Trump, on the other hand, would focus on capping deductions, at $100,000 per person.
Overall, these changes will have the most impact on higher-income earners. Let’s take a look at some specific year-end moves that can put you in a better position for those expected changes in 2017, if you fall into that category.
If Obamacare is scrapped, which many folks and businesses hope it is, then the added Medicare surcharge tax of 3.8 percent that went into place in 2013 to help pay for it should be scrapped as well. So, it may make sense to hold off on selling any appreciated assets until 2017.
On the other hand, with deductions likely limited in 2017, take advantage of the 2016 deduction rules by the end of this month. If you have any upcoming deductions, like a planned contribution to a charity, make those sooner rather than later.
In addition to these two strategies, there are several tax-related issues that many Americans, at all income levels, should be reviewing this holiday season.
First off, don’t forget to take your RMDs. Remember, if you are older than 70 ½ years, generally you are required to take a minimum distribution from your IRAs. If you do not, the IRS will take 50 percent of what you should have taken.
Consider harnessing the power of a Roth IRA. If you don’t already have one, please take a moment to read a column I wrote last year highlighting the many tax-advantaged reasons to have one (http://old.cutterfinancialgroup.com/digging-deeper-into-your-ira/).
If you have a traditional IRA, this is also a good time to look at a Roth conversion to see if one makes sense for you. Make sure you seek a qualified tax and/or retirement professional to do an analysis. While there are many benefits to a Roth conversion, such as all future earnings can be withdrawn tax-free, if not appropriately designed, a conversion can unintentionally push a taxpayer into a much higher tax bracket, making the conversion less attractive.
If you are thinking of starting a job at a new company next year, now is the time to make sure you do not have any loans against your current company’s 401(k) before you walk out the door. If you have an outstanding loan when you leave the company, it will be considered a distribution. At best, this amount will be taxed at your highest tax bracket. At worst, if you are under 55, you will be charged an additional 10 percent penalty on the outstanding balance.
Lastly, earn some green on your green energy. If you have installed any alternative energy sources within your home this year, like solar electric panels, or solar hot water heaters, 30 percent of the total cost to you is available as a tax credit. Make sure you keep your receipts and take advantage of the unlimited credit available from these updates.
Taxes are not incredibly festive; I get it. But I would argue that everyone gets a little more cheerful and jolly when they can save money. This season as you hustle and bustle around town getting gifts for everyone on your list, embrace your “OTD, or Obsessive Tax Disorder,” and give yourself the gift of seeing a qualified tax and/or retirement specialist. After all, now is the “most wonderful time of the year” to jump on any tax advantages available to you.
Folks, it is not always what we earn that gives us the financial success we all want; however, it is what we keep. So, when it comes to your tax strategy this holiday season, be vigilant and stay alert, because you deserve to keep more.
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