Now that summer is wrapping up and fall is almost here (YES!!! Deer season!), it’s a great time to do some tax planning for 2016. You’ve got nearly four months to make adjustments and decisions before the year closes. Ideally, you’d start the year with a tax plan based on your expected tax bracket and be able to make minor adjustments along the way. If you wait until the very last minute, you might not have the cash on hand to make any meaningful changes.
Tax planning is more than figuring out if you are getting a refund or paying in. It’s about your total tax bill and reducing that as much as you legally can. Why pay more in taxes than you absolutely have to?
Here are a few common things to think about as we work through the rest of the year:
Tax deferred accounts (401(k)s, HSAs, 529s)
Are you maxing these out? Many people know they should be maxing out their 401(k) or IRAs, but often don’t think about their HSAs. If you are on an HSA compliant health insurance plan, you can fund an HSA with tax free funds. These funds stay with you even if you change jobs. Often, you can invest these just like a retirement account. Often times, people only put in as much as they think they are going to use in a year but maxing it out will reduce your tax bill and you can pay for medical related expenses in the future. Also, upon reaching the age of 65, you would not be assessed the 20% penalty on any withdrawals not used for approved medical expenses.
To Defer or Accelerate
If you expect to be in the same or a lower tax bracket next year, deferring taxable revenue to next year and accelerating deductible expenses this year is a good idea.
If you expect to be in a higher tax bracket next year, accelerate revenue to this year and defer deductible expenses to next year.
Charitable Contributions
Make sure you are keeping receipts for charitable contributions. Remember, you must not receive any goods or services for these contributions to be tax exempt (Sorry racers, I know many races support charitable organizations but you are paying a fee to do a race….you are getting the race out of it. The only amount that is deductible is the amount you contribute above and beyond the race fee). Check with your tax advisor on donating appreciated capital gains assets that have been held for a year or longer instead of cash. You may be able to claim the deduction for the fair market value and avoid the capital gains tax.
There is no shortage of ways to reduce your taxable income for 2016. Contact your tax advisor or call CMK Financial Services to review your options.