By LUCY CARTER, CPA

Go with What We Know, Act before Year-End

As in any presidential election year, there is uncertainty about tax legislation for 2017 and beyond. Without a crystal ball to predict the future, taxpayers are wise to “go with what we know.” Consider the provisions that are in effect for 2016 and be proactive vs. reactive in decision-making before year-end.

Advice #1: Know Where You Stand

Before you take any action, it’s important to project your tax liability for 2016 based on what’s known. From an income perspective, review your most current pay stub if you are a W-2 employee or your current net taxable income if you are self-employed (or a member in an LLC). Based on your income (annualized), are your withholdings or estimated payments sufficient to cover your tax liability or, at the very least, eliminate an underpayment penalty? If not, make the adjustments now to minimize the prospect of unhappy surprises in April. Likewise, if you appear to have overpaid taxes, you might consider reducing your withholding/estimated payments now to create an early refund.

Advice #2: Maximize Retirement Funding

If you have the opportunity to defer income into a 401(k) or 403(b) plan, make sure you maximize your deferral before year-end. Retirement funding is the best tax savings strategy; it’s like taking money from one pocket (personal cash) and putting it in another pocket (retirement plan investments) and saving taxes in the process. If you don’t maximize your deferral, you might also be losing out on employer-matching contributions. The same advice applies for maximizing funding of self-employed plans (although most plans allow for a deductible contribution to be made by the due date of the return plus extensions).

Advice #3: Take Advantage of Capital Losses to Offset Capital Gains

With the potential for a 23.8 percent tax rate on long-term capital gains (20 percent maximum capital gains tax and 3.8 percent investment tax), offsetting the capital gains with capital losses can assist in reducing the tax burden. Keep in mind that losses can only be deducted to the extent of gains plus $3,000. Any unused losses can be carried forward to future years.

Advice #4: Consider Year-End Giving

Gifts to charitable entities can reduce taxable income dollar for dollar (depending on your ability to itemize deductions). A gift of appreciated property can provide double savings. The appreciation on personal property is not taxed, and you may deduct the appreciated value of the property as a charitable contribution (subject to limitations). A gift of appreciated marketable securities works very well – elimination of the capital gains and investment tax, deduction of the appreciated value, and the gift is not subject to an independent appraisal since the value is determined based on the open market.

For taxpayers over 70-and-a-half years of age, direct contributions (Qualified Charitable Distributions) up to $100,000 can be made to qualified charitable organizations. QCDs reduce the required minimum distribution and can provide additional income tax savings (i.e. potentially reducing the taxable amount of Social Security benefits).

Advice #5: Keep up with Sales Tax

Since the sales tax deduction has been made permanent, it is important to keep up with sales tax on items that can be added to the table amounts provided by the IRS. Sales tax on autos, motor homes, boats, and motorcycles can be added to the calculated table amount. Additionally, sales tax on materials for home construction or substantial improvement of your home can provide an additional deduction. And, if you are a big spender, keeping receipts and deducting the actual amount of sales tax spent (vs. the table amount) may provide additional tax savings.

Even with uncertainty in the future tax landscape, planning should be viewed from a multi-year perspective. Future changes in both income and deductions will impact current planning decisions. Likewise, always consider the economic impact of any tax-planning decisions. Any tax strategy that seems too good to be true probably is.

Lucy Carter, CPA, is a member/owner in Nashville-based KraftCPAs PLLC and practice leader of the firm’s healthcare industry team. She has more than 35 years of experience providing tax, litigation support, audit, compliance, management consulting, reimbursement, and compensation services to healthcare providers. Carter can be reached at lcarter@kraftcpas.com.