The end of the year is the optimal time to assess your personal tax situation.  

Strategy: Shift income and deductions to your tax advantage. For instance, you might postpone income to 2017 and accelerate deductions into 2016 to improve your overall tax picture. There is no shortage of year end tax planning ideas, but here are 10 of the most popular techniques.

1) Make it harvest time for stock losses. This is the traditional time of the year to harvest capital losses from dispositions of stocks and other securities. The losses can offset capital gains recognized earlier in the year plus up to $3,000 of highly taxes ordinary income. Any excess capital loss is carried over to 2017. Conversely, you might harvest capital gains that will be sheltered by capital losses recognized earlier this year. Long term gains are taxes at a maximum tax rate of only 15% or 20% for investors in the top ordinary income bracket of 39.6%  Even better, long term gains are taxed at a 0% rate for investors in the two lowest ordinary income tax brackets. This could be especially valuable to family members with modest incomes such as your children

2) Dodge the NII tax.  A 3.8% surtax applies to the lesser of net investment income or modified adjusted gross income in excess o f$200,000 for single filers adn $250,000 for joint filers. Although NII includes most investment income items, like interest, dividends, and capital gains, distributions from qualified retirement plans and IRAs are excluded. If possible, reduce exposure to the NII tax by adjusting your portofolio, increase investment in tax exempt municipal bonds.

3) Step up charitable donations  Generally you can write off the full amount of monetary donations made to qualified charitable organizations in 2016 as long as substantiation requirements are met. This includes gifts charged by credit card in December event if the charge is not paid until 2017 Also if you donate property you have owned longer than one year, you may deduct the property's fair market value instead of your basis. 

4) Ward offAMT The alternative minimum tax (AMT) continues to be a thorn in the side of millions of moderate to high income taxpayers. However, if you estimate your AMT liability now you can make certain adjustments, such as avoiding tax preference items that may trigger an increase an AMT liability. For instance, you might delay the exercise of incentive stock options to next year.  Alternatively, if you will definitely own the AMT this year, you might accelerate some income into 2016. The top AMT rate is 28% compared to a top regular income rate of 39.6%, so you could actually save tax on the extra income accelerated into this year.

5) Chalk up education tax benefits. Thanks to the PATH Act, the tuition deduction has been extended again, buty only through the end of 2016. Alternatively, you can generally choose one of two tax credits for higher education expenses. The maximum American Opportunity Tax Credit which is potentially available for undergraduate students remains $ 2,500 under the PATH Act. Conversely, the maximum Lifetime Learning Credit is $2,000 per household.  No matter which route you go, consider paying the expenses for the nest school session that begins in early 2017 in December if it will increase the tax benefits for 2016. Note the three tax breaks, the tuition deduction, and both credits are all phased out for moderate to high income tax payers.

6) Show faith in a conversion  If you convert a traditional IRA into a Roth account you must pay tax in the year of the conversion, but you may benefit from tax free payouts in the future. This may finally be the year for you to convert if you expect 2016 to be a low income year.  For most taxpayers, the optimal approach is to use a series of conversions that maximize the benefits of lower tax brackets over a period of several years

7) Wrap up dependency exemptions  Normally you can claim a $4,050 dependency exemption in 20165 for a child who is under age 19, or a full time student under age 24, if you provide more than half of the child's support for a year. Unlike other qualfying relatives, there is no limit on the taxable income the child can receive. To ensure you beat the half-support mark for a child who graduated from college this year, be extra generous this holiday season with your support. 

8) Heal medical deduction woes  It is tough to qualify for medical deductions but not impossible. For 2016, the deduction is limited to the amount of qualified expenses in excess of 10% of AGI or 7.5%  if you will be age 65 or older as of year end.  Schedule nonemergency visits, such as physical exams and dental cleanings before 2017 to help clear the threshold. Other wise you might as well postpone these expenses to next year when you can take another shot at a deduction. Note the 7.5% of AGI is scheduled to increase to 10% in 2017.

9) Work out an installment sale.  As a general rule income from a sale of property like real estate is fully taxable in the year of the sale. However if you arrange an installment sale where the buyer's payments are spread out over two or more years you pay tax on a portion of the proceeds you might reduce your overall tax bill by taking advantage of lower tax brackets in multiple years.

10) Choose your state tax deduction  In lieu of deducting state and local income tax , you can elect to write off general state and local sales taxes paid in 2016. This optional deduction which had expired and been reinstated sevearl times is now permanently preserved bu the PATH Act. The deduction is base on your actual sales tax receipts or a simplified state by state table provided by the IRS

               DANIEL CULLINANE CPA                                                              Phone:          732-516-1648

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HOW TO CUT PERSONAL INCOME TAX




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