By Doug York, CPA, Partner
Making good tax decisions at 2016’s end can lead to a happy new year in 2017. At year-end, there is a better picture of income and cash flow; now is the time to make decisions that could affect how much you’ll pay in taxes. Tax planning in general shifts income into years with lower tax rates and takes deductions in years with higher rates. If rates are equal, cash flow improves through income deferral and accelerated deductions.
This year is unique: the Protecting Americans from Tax Hikes (PATH) Act brought some certainty to year-end tax planning by making permanent many tax incentives that previously were annually extended. However, the 2016 presidential election results, coupled with the Republican congressional majority, could present a different tax landscape in 2017. Campaign comments indicate the possibility of lower tax brackets and fewer incentives; we’ll not know until an additional tax act is enacted in 2017. Based on today’s situation, we’ll review several strategies and tactics to limit income tax liability for individuals and businesses:
- Married couples typically have tax advantages if they file jointly; however, if one spouse has high medical bills, filing separately can reduce tax liability by increasing medical itemized deductions.
- Buying a home has a range of tax ramifications. If you’re planning to buy a home – and you have loans that don’t allow for an interest deduction – check to see if you can save money by financing as much of your new home as you can, up to the down-payment limit, using any money you’d planned for a larger down payment to instead pay off the non-deductible loans.
- Currently mortgage insurance premiums are deductible through the end of 2016, not 2017. With interest rates still low, it may be a good time to refinance and remove the premiums from your payments.
- One PATH Act item not extended is the deduction for college tuition. If you’re able to take advantage of this deduction, you may want to make the maximum payments by the end of 2016.
- If you’re over 70½, the PATH act made permanent your ability to exclude from income up to $100,000 of distributions from your IRA directly to a qualified charity.
- Accrual-basis taxpayers can declare a bonus for unrelated employees and properly accrued an expense in 2016 as long as the bonus is paid by March 15, 2017.
- Businesses can affect taxable income by timing their investment in capital improvements. Bonus depreciation and first-year expensing under section 179 can both have an immediate impact on the current year’s taxable income.
- The PATH Act extended bonus depreciation on new assets but included a phase-down over a four-year period. The amount remains at 50 percent for 2016 and 2017, but drops to 40 percent in 2018 and 30 percent in 2019.
- Section 179 expensing has been permanently set at $500,000 and an investment limit of up to $2.01 million. Both amounts are indexed for inflation, and are available for assets placed in service up to Dec. 31, leaving about five weeks in the year to make this happen.
- Heavy SUVs and pick-up trucks over 6,000 pounds are still eligible for a $25,000 deduction if purchased before Dec. 31, 2016.
With a new administration coming to power in Washington, the tax situation a year from now may be very different. Changes, whenever they occur, ripple across the entire system. The best idea: Find a tax advisor or accountant in whom you can put your trust, and listen carefully.
Rodefer Moss is a three-state accounting firm with offices in New Albany, Corydon, and Georgetown, Ind., Louisville, Ky., and four offices across Tennessee. The firm’s website is www.rodefermoss.com