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Tax Strategies To Consider Before Year-End

Rocco A. Carriero

Most financial decisions designed to reduce your tax bill next April have to occur by December 31st. (Courtesy Photo: lesliehawes.com)

This may be the most important time of year when it comes to managing your tax liability. Most financial decisions designed to reduce your tax bill next April have to occur by December 31st. Here are five strategies to consider that might help you keep more of your money:

Avoid bracket creep

If you have the ability to manage your income, you may want to check to see if your income level this year could move you into a higher tax bracket. If your income is approaching a threshold, it may make sense to collect some of your income in 2017, rather than before year-end.

For example, a married couple filing a joint return in 2016 with taxable income above $75,300 (after deductions and personal exemptions) would be in the 25 percent federal tax bracket. That doesn't mean all income is subject to a 25 percent tax rate, as income is taxed in steps (everything under $75,300 would be taxed at a 15 percent federal tax rate or less). But by reaching the 25 percent tax bracket, any net long-term capital gains would be subject to a 15 percent tax at the federal level. By keeping income (including any capital gains) below $75,300, a married couple remains in the 15 percent tax bracket, qualifying them for a zero percent long-term capital gains tax rate.

Remember your favorite charities

Not surprisingly, this is the season when charitable contributions reach their peak. Your donations to qualified charities (properly documented with receipts or confirmations from the charity) could potentially be deducted on your tax return if you itemize deductions. Making certain that contributions occur in 2016 may help limit your tax liability this year.

Along with gifts of cash or tangible items to a charity, another way to reduce taxable income is to give stock to charity. This is especially effective with appreciated stock that would otherwise incur a long-term capital gain when it is sold. Gifting not only negates the tax consequences of the gain, but you are allowed to deduct the full market value of the stock on the day the gift is made. One important note - don't wait until the final days of the year to begin this process as the transaction may take time. Make sure it can be completed before the year is out to claim a deduction in 2016.

Accelerate itemized deductions if it makes sense

Take a look at what you plan to file this year for taxes. Are you leaving any opportunities - or deductions - on the table? One way to check is to review the total amount of deductions you could take and compare it to the standard deduction ($6,300 for a single person, $12,600 for married couples in 2016). If your deduction total is near the threshold of the standard amount, you may want to claim additional deductions so you can potentially lower your tax bill.

However, be sure you know how various tax moves may impact your financial situation before making each decision. Consider meeting with a tax professional who can help you sort out what makes sense for you.

Boost retirement plan savings

Reduce taxable income by making contributions to retirement savings plans. Pre-tax contributions to your workplace plan are deferred from current income. You can set aside up to $18,000 of income into a workplace plan if you are under age 50, or up to $24,000 if you are 50 or older. If you are covered by an employer-sponsored plan, you can make fully deductible contributions if you meet certain income requirements.

Those not covered by a retirement plan at work can make tax-deductible contributions to an individual retirement account (IRA). The IRA contribution limit for 2016 is 100 percent of compensation up to $5,500 for those under age 50 and $6,500 for those ages 50 and older.

Lock in losses on disappointing investments

You may be able to salvage something positive from an investment that has performed poorly if you sell it at a loss. Consider selling investments that have lost ground in a taxable account by year end. Those capital losses first wipe out other capital gains, and then up to $3,000 of other forms of income. If your 2016 capital losses exceed what you can use to offset gains and then other income, they can be carried forward to help reduce your tax liability in future years.

Before selling assets, make sure the move is consistent with your long-term investment strategy. Remember that one of the biggest tax benefits is maintaining unrealized capital gains - growth in an investment that you continue to hold. Gains are taxable when you sell an investment.

Keep in mind that the ideas included in this article are for general information and are not intended to be the primary basis for investment decisions. This information should not be construed as advice designed to meet the needs of an individual investor. Please seek the advice of a financial advisor regarding financial matters and consult your tax advisor or attorney regarding specific tax issues and strategies.


Rocco is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 13 years. Advisors is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ. Ameriprise Financial Services Inc., and its representatives do not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. www.roccocarriero.com




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