16 Year-End Money Tips for 2016

The 2016 year-end money tips post is a complicated one, because of major tax changes that are expected to occur next year under the Trump Administration. While there is no single plan to analyze yet, both candidate Trump’s plan and Speaker of the House Paul Ryan’s plan, would cut ordinary income tax brackets, increase standard deduction amounts and repeal and/or limit personal exemptions and itemized deductions. The coming changes mean that you may need to rethink what you have done in the past to prepare for the year-end and adjust your actions to reflect what is likely to be a new tax environment.

1. Accelerate Itemized Deductions: The main theme for 2016 year-end planning for the nearly one-third of taxpayers who itemize their deductions is clear: you should determine whether it makes sense to pre-fund deductions, like state and local taxes, mortgage interest, and charitable donations this year, because they are likely to be less valuable or potentially go away, next year.
2. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). So try to bunch legal advice and tax planning, travel and vehicle costs into one year, so you exceed these the 2 percent floor.
3. Give Bigger Charitable Donations: You may want to give next year’s or future years charitable gifts in 2016, in order to take advantage of the changes on the horizon.
4. Use Highly Appreciated Securities for Charitable Contributions: If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains.
5. State and local taxes: If you live in a high tax state or municipality and itemize deductions, you can deduct property taxes paid. While many high-income earners lose a chunk of this write-off due to the alternative minimum tax, many others may benefit from paying whatever is due for 2016, before year-end.
6. Don’t Pre-Pay Mortgages: Before you start making your 2017 mortgage payments now, you should know that the IRS does not allow you to take deductions for prepaid mortgage interest expenses. That said; if you are a high earner and are thinking about a re-fi or new home loan, just know that the value of the mortgage interest deduction is likely to shrink in the future.
7. Wait to sell winners in taxable accounts: The usual advice is sell winners, but considering that capital gains tax rates are likely to drop in the future, especially for high earners, you may want to hold off. But if you expect your income to be much higher next year, you may want to realize capital gains today at the lower rate. Your taxable income includes the gain, so factor that in when you make your decision.
8. Sell losers in taxable accounts. If you have investment losses in a taxable account, you can sell them to offset gains that you have taken previously in the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. If you’re going to sell something and replace it within thirty days, the new asset can’t be “substantially identical,” which is known as the wash sale Avoid it by waiting 31 days and repurchase what you sold, or replace it with something that’s close, but not the same as the one you sold.
9. Use your gift tax exclusion. You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. If you combine gifts with a spouse, you can give up to $28,000 per beneficiary, per year.
10. Fully fund your college savings 529 plan. Money saved in these programs grows tax-free and withdrawals used to pay for college sidestep taxes, too. You can invest up to $14,000 in 2016 without incurring a federal gift tax and many states offer state tax deductions for the contributions.
11. Pay someone's education or medical bills.You can make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your lifetime gift-tax exemption.
12. Fully fund employer-sponsored retirement plan contributions. The deadline for funding 401 (k), 403 (b) or 457 plans is December 31. If you are not maxed out yet, you may be able to bump up your contribution limit on your last couple of paychecks. The limit is $18,000, plus an additional $6,000, if you are over 50.
13. Consider converting Traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now instead of in the future. Whether or not a conversion makes sense for you depends on a number of factors, the most important of which is whether or not you can pay the tax due with non-retirement funds.
14. Take Required Minimum Distributions (RMD). Uncle Sam requires that you withdraw money from retirement accounts after you turn 70 ½. (IRS rules are complicated, so please consult IRS.gov for more specifics.) RMD withdrawals must occur by December 31^st and failure to do so results in a whopping 50 percent penalty on the amount you should have withdrawn. If you have multiple individual retirement accounts, you only need to take one RMD from all, based on your age and the total value of the accounts. BUT, if you also have a 401K or 403B, you need to take the RMD from each account individually.
15. Consider a Qualified Charitable Distribution (QCD). Last year, Congress finally made Qualified Charitable Distributions a permanent part of the tax code. This technique allows you to sidestep the taxation on your RMD by making a gift up to $100,000 directly from your IRA to a charity without having to include the distribution in your taxable income. If you use it, you swap having to claim the income for making a charitable deduction.
16. Open a small business retirement account. If you open a qualified retirement account by December 31, you have until the day you file your taxes next year, including extensions, to make this year's contribution. One plan to consider is the solo or one-participant 401(k) plan, which allows total contributions, not counting catch-up contributions for those age 50 and over, of up to $53,000 for 2016.