Appropriate Checklists for Year-End Tax Planning

| November 22, 2016

BushWealthAdvantage (1)

Tax planners often develop checklists to guide taxpayers toward year-end strategies that might help reduce taxes. Typically, suggestions are grouped into several different categories, such as “Filing Status” or “Employee Matters,” for ease of reading. When year-end approaches, it might be wise to review each suggestion under the categories that may apply to you.

  • Filing Status and Exemptions
    If you’re married (or will be married by the end of the year), you should compare the tax liability for yourself and your spouse based on all filing statuses that you might select. Compare the results when you file jointly and when you file married separately. Determine which results in lower overall taxation.
  • Determine whether you’re entitled to claim a dependency exemption for a parent or other relative. You will need to have contributed more than half of that individual’s support during the year, and other conditions may also apply.
  • If you’re claiming a dependency exemption for a child who is 19 or older (age 24 or older if a full-time student), make sure that the child’s gross income doesn’t exceed $4,050 (for 2016, $4,000 for 2015).
  • If you and several other people financially support someone but none of you individually qualifies to claim the individual as a dependent, you should consider making an agreement with all of the other parties to ensure that at least one of you can claim the individual as a dependent.

Family Tax Planning

  • Determine whether you can shift income to family members who are in lower tax brackets in order to minimize overall taxes.
  • The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those age 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
  • Consider making gifts of up to $14,000 per person federal gift tax free under the annual gift tax exclusion. Use assets that are likely to appreciate significantly for optimum income tax savings.
  • Take advantage of tax credits for higher education costs if you’re eligible to do so. These may include the American Opportunity (Hope) credit and the Lifetime Learning credit. Note that these credits are based on the tax year rather than the academic year. Therefore, you should try to bunch expenses to maximize the education credits.
  • If you have qualified student loans (and meet all necessary requirements), you may be entitled to take a deduction for the interest you paid during the year. The maximum amount you can deduct is $2,500.

Employee Matters

  • Self-employed individuals (who generally use the cash method of accounting) can defer income by delaying the billing of clients until next year. You may also be able to defer a bonus
    until the following year.
  • Use installment sale agreements to spread out any potential capital gains among future taxable periods.
  • Employees can deduct their business expenses as long as these expenses exceed 2 percent of annual adjusted gross income (AGI). Therefore, attempt to bunch as many of these business expenses as possible during the current year in order to maximize the deductions.

Financial Investments

  • Pay attention to the changes in the capital gains tax rates for individuals and try to sell only assets held for more than 12 months.
  • Consider selling stock if you have capital losses this year that you need to offset with capital gain income.
  • If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Bush Wealth Management and LPL Financial are separate entities.

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