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15 Year-End Tax Planning Moves for Second-Halfers


With Thanksgiving right around the corner, there’s still time for several strategies that may help minimize your 2016 personal tax burden. I’ve segmented the list into strategies for everyone 50 or older, those for age 65+, and those only applicable to folks who’ve reached the age 70½ milestone.

If you’re age 50+

Defer income into 2017

If you’ll be receiving a year-end bonus or other significant income—and your taxable income will likely be lower next year—consider if you’d be better off arranging to receive that income in 2017.

Accelerate deductions into 2016

If you itemize your deductions on federal Schedule A, consider how you might benefit by shifting more deductions into this tax year. Charitable contributions made by December 31 are a good example. Or if you’ve reached the threshold for deductible medical and dental expenses (10% of adjusted gross income for taxpayers under age 65), elective healthcare and/or check-ups could be scheduled and paid by year-end to make them deductible.

If you’re subject to Alternative Minimum Tax (AMT), not all deductions are allowable under AMT. Be careful the acceleration strategy doesn’t backfire on you.

Harvest capital gains and offset with capital losses

If you’ve sold investments at a gain earlier in the year (or will do so by year-end), consider also selling certain investments at a loss by year-end to offset those gains. You can deduct up to $3,000 of any excess capital losses and carry forward any remainder for offset against future capital gains.

But don’t let the tax tail wag the investment dog. Your buy-sell decisions should be made primarily on investment merit, with tax a secondary consideration. Also, if you wish to buy back the investment you sold at a loss, be aware of the 30-day wait period under “wash sale” rules.

Maximize deductible contributions to your retirement plan at work

Participants in a 401(k), 403(b), or 457(b) retirement plan through work can contribute up to $18,000 to their plan. But if you’re age 50+, you can also make a $6,000 age-related catch-up contribution, for a total of $24,000.

Contributions through payroll must be made by December 31. Since it’s late in the year, you’d presumably need to make a temporary payroll deductions adjustment. But the strategy might work well for you if you have other resources and don’t need to live on your December paycheck or if you’ll be paid a large bonus.

Note that the December 31 deadline doesn’t apply to IRA contributions ($6,500 for those age 50+), which can be made until tax filing deadline.

Donate appreciated investments to charity

As noted above, if you itemize your deductions on federal Schedule A and there are important charitable causes you care about, consider making (additional) contributions by December 31.

An alternative to donating cash is to contribute long-term investments (outside of retirement plan) that have gained in value. The tax benefit? You can take a deduction for the investment’s fair market value up to 30% of your adjusted gross income and you will not have to report any capital gains. The charity is then free to sell the investments and pay no tax.

Health Flexible Spending Arrangement (FSA) year-end planning

If you have an FSA through your work, the tax-favored benefits for health spending will be lost if you don’t use it by year-end. That is, unless your employer offers a (limited) carryover option or 2½ month grace period.

This would also be a good time to plan your FSA health spending for 2017.

Conversions to Roth IRA

If you have a 401(k), IRA, or other pre-tax retirement plan and your 2016 income is in the lower tax brackets, consider if it may be beneficial to convert at least some of that to a Roth IRA. Note that, unlike tax filing deadline for contributions, Roth conversions must be done by December 31.

I’ve helped clients with a multi-year Roth conversion strategy. We convert just enough each year to keep them in the lower income tax brackets. The end result? They paid little tax to end up with tax-free resources that have potential for future tax-free growth.

529 college savings plan contributions

Many states offer tax-favored 529 college savings plans, with considerable flexibility as to who can benefit. They’re not just for our kids and grandkids…we can use them ourselves.

Some states allow a deduction (subject to limits) against taxable income on the state income tax return. Several states require such contributions be made by December 31, which is why I list it here as a year-end planning strategy.

Oregon allows a deduction for contributions made up to tax filing deadline, to a maximum of $2,310 for single filers and $4,620 for married filing jointly.

Annual gift tax exclusion

If you’re trying to reduce the size of your estate or simply help your kids or grandkids, you can give them up to $14,000 annually without having to file a gift tax return and use up part of your lifetime exemption. The gift must be completed by December 31 to apply to this tax year.

If married, you and your spouse can choose to combine gifts for a total of $28,000 per donee per year.

Note that gifts toward medical expenses or college education may be paid directly to those institutions without having to use up any of the $14,000 annual exclusion.

If you’re age 65+

Additional standard deduction

No action needed by year-end, but if you turned 65 and claim the standard deduction, be aware that you now receive a larger total deduction: $7,850 for single filers and $13,850 for married filing jointly.

Medical and dental expenses deduction

In order to deduct medical and dental expenses, folks under age 65 must itemize their deductions on Schedule A and incur expenses greater than 10% of their adjusted gross income.

Those age 65+ have an advantage in that the deduction threshold is expenses greater than 7.5% of adjusted gross income. In 2017, the threshold will increase to 10% like for everyone else unless congress extends it.

So as noted earlier, if you’re close to meeting the threshold and you use Schedule A, you may wish to arrange for medical/dental procedures to be completed and paid by year-end to accelerate the deductions into 2016.

Medicare Part B premiums for higher income recipients

If you’re currently on Medicare or will be in 2018, be sure to consider how your income/deduction decisions for this year may affect future premiums.

Why? Higher income recipients pay a much higher Medicare Part B premium than the majority. And the premiums you pay are based on your modified adjusted gross income (MAGI) on the tax return you filed a couple years back.

Currently, higher premiums begin to kick-in at MAGI of $85,000+ for singles and $170,000 for married filing jointly. Here's a helpful Medicare link on it. For most people, MAGI is their adjusted gross income (bottom of p.1 of Form 1040) plus tax-free municipal bond interest.

If you’re age 70½+

Required Minimum Distributions (RMDs)

If you turned 70½ this year, you must take what are known as Required Minimum Distributions (RMDs) from your retirement plans, except from a Roth IRA. These must be complete by December 31. And it’s serious business because Uncle Sam charges a 50% penalty tax on the amount you were supposed to have taken but didn't. Yes, you read that right!

Your RMD will change every year based on your account balance on the prior December 31 and a life expectancy factor from IRS tables.

The first year only, you can wait until April 1 of the year after you turn 70½, but that’s generally not advisable (unless it’ll be a low income year) because you’ll end up having to take two RMDs for that year.

Maximum IRA distribution that avoids Social Security taxation

Social Security is taxable federally based on a concept called “provisional income.” Provisional income is basically half of your Social Security, plus other taxable income, plus tax-free municipal bond interest.

Social Security benefits are not federally taxable for an individual with less than $25,000 or married couple with less than $32,000 of provisional income. 50% of benefits are included in taxable income for an individual with $25,000-$34,000 or married couple with $32,000-$44,000. Beyond that and 85% of benefits are included in taxable income.

In some instances, I’ve been able to help lower income clients not only take their RMDs but also distribute additional pre-tax funds yet pay no tax because we stayed under the taxable threshold. A strategy to consider for those in a similar situation.

Qualified Charitable Donation (QCD)

If you financially support charitable causes and must take an annual Required Minimum Distribution from your IRA, consider making a Qualified Charitable Donation directly from your IRA to the charity.

What’s the benefit? When the contribution is made directly from your IRA, you don’t get a tax deduction for the donation but neither will you have to claim it as taxable income. And since your adjusted gross income triggers a number of other tax items, the lower you can keep your AGI the better.

Limitations? The gift must be completed by December 31 and the gift can be no larger than $100,000 (if you want exclusion from your taxable income).


I’ve only scratched the surface with these strategies. As with all tax matters, be sure to talk with your tax professional about any nuances and how these may apply to you. (SecondHalf clients feel free to contact me.)