YEAR-END TAX STRATEGIES for 2016

WORDS BY JAMES R. MARING

The holiday season is upon us. This also means there is limited time to take advantage of potential income tax strategies for 2016. However, if you are able to determine your potential tax liability for 2016 and estimate your potential liability for 2017, there are still a few opportunities you may want to explore before the end of the year which could reduce or defer your tax liability.

Increase Withholding

If you’re going to owe tax for the year, you may want to ask your employer to increase your withholding for the remainder of the year to reduce your tax liability at year-end. The largest benefit in doing so is that withholding is considered to have been paid evenly through the year, rather than when the amounts are actually withheld from your paycheck, which can help reduce any potential estimated tax penalty when you file your taxes.

Make Certain PAYMENTS EARLY

If you itemize deductions, certain payments for deductible expenses such as state taxes, medical expenses and qualifying interest could be paid by year-end rather than in early 2017. This would lower your tax liability in 2016 but likely increase your tax liability in 2017. Therefore, it would be important to have previously determined which year makes the most sense based on your potential liability in each year. It is also important to determine if you are subject to alternative minimum tax in 2016. This will influence the decision as to whether or not an acceleration of deductions will be helpful.

Income Deferral

If there is a good possibility you will be in a higher tax bracket in 2016 than 2017, you may want to look for ways to delay receiving certain payments until 2017. For example, maybe you can defer a year-end bonus until early 2017 rather than receiving it at year-end.

Investment Sales

Tax motives should never be the primary factor in determining investment decisions. However, if you have an investment that is losing money that you were planning on selling anyway, you may want to consider selling before year-end to utilize the loss for tax year 2016.

CONTRIBUTE to RETIREMENT

If you haven’t already contributed up to the maximum amount allowed for a traditional IRA or your employer-sponsored retirement plan such as a 401(k), you may want to consider this before the end of the year to reduce your taxable income for 2016.

Required DISTRIBUTIONS

With some exemptions, you generally must start taking required minimum distributions from your traditional IRA and/or employersponsored retirement plan once you reach the age of 70 and a half. Take any distributions by the date required which is usually the end of the year. The penalty for not taking the required minimum distribution is equal to 50 percent of any amount that was required to be distributed.

Tax Advice

Getting professional tax advice tailored to your specific situation can be extremely beneficial for you to potentially reduce your tax liability.

This article was prepared by Jim Maring, an attorney with the Serkland Law Firm in Fargo, North Dakota. For more information call 701232-8957, email jmaring@serklandlaw.com or visit serklandlaw.com.

This article should not be considered legal advice and should not be relied upon by any person with respect to his/her specific situation.