Erickson Financial Solutions Blog
Tax Savings Action List for 2016
16 Of The Best Tax Moves For The Summer Of '16
Now that the Protecting Americans from Tax Hikes (PATH) Act has removed some of the uncertainty, tax planning during the summer of 2016 should be a breeze. Here are 16 tax-saving opportunities that may be available to you midway through the year:
1. Capital losses: If you cashed in stock winners earlier in the year, you can start filling up the loss side of the ledger. Your capital losses will completely offset capital gains that you realize in 2016, plus up to $3,000 of highly taxed ordinary income.
2. Capital gains: Meanwhile, if you sell securities and earn what qualify as long-term capital gains, the maximum tax rate is only 15% or 20% if you're in the top ordinary income tax bracket. But some upper-income investors also may have to pay a surtax of 3.8% on investment income.
3. Higher education: Is your child going to college in the fall? Lay the groundwork for tax breaks. You may be able to claim a higher education tax credit or a tuition deduction, though these tax advantages are phased out at relatively modest income levels. The PATH Act restores the tuition deduction and makes the American Opportunity tax credit permanent.
4. Wash sales: If you acquire substantially identical securities within 30 days of selling an investment at a loss, you can't deduct the loss. But this "wash sale" rule can be avoided by waiting at least 31 days to buy back the same securities. Or you could buy the additional securities first and wait at least 31 days before selling your original shares.
5. Dividend-paying stocks: Most stock dividends are taxed at the same preferential tax rates as long-term capital gains. To qualify for this tax break, you must hold the shares for at least 61 days.
6. Installment sales: Generally, you can defer tax on the sale of real estate or other property if you receive payments over two years or longer. Besides stretching out tax payments over time, you might reduce the effective tax rate if you stay below the thresholds for higher capital gains rates and the 3.8% surtax.
7. Hiring your child: Does your child need a summer job? If you hire the child to work at your business, your business can deduct the wages, which will be taxable to your child at his or her low tax rate.
8. 401(k) contributions: Reduce your tax liability by increasing contributions to a 401(k) plan at work. For 2016, the maximum deferral is $18,000 ($24,000 if you're 50 or older). Not only do you avoid tax on the contributions, the money in your account compounds tax-deferred until you withdraw it, probably during retirement.
9. Qualified small business stock: Invest in qualified small business stock (QSBS) of a fledgling company (perhaps your own). The PATH Act restores a 100% tax exclusion for sales of QSBS if you hold the stock at least five years before selling it.
10. Roth IRA conversions: You can convert some or all of the funds in a traditional IRA to a Roth. In return for paying income tax on the converted amount, future Roth IRA distributions will be tax-free if they meet certain conditions. To minimize the current tax impact, you could stagger taxable conversions over several years.
11. Vacation homes: You can write off certain rental activity costs, plus depreciation, but be careful: If you use the rental home for more than 14 days or for 10% of the days the home is rented out, whichever is greater, your deductions are limited to the amount of your rental income.
12. Dependency exemptions: You probably still can claim a $4,000 dependency exemption for a child graduating from college in 2016 if you provide more than 50% of the child's annual support. Figure out the amount needed to put you over the half-support mark.
13. Charitable gifts of property: Don't toss out old furniture and clothing; give items in good condition to charity. Generally, you can deduct the fair market value of property donated to a qualified organization, within certain limits.
14. Conservation easements: A special tax provision allows you to claim deductions for donating conservation easements involving property you own. Under the PATH Act, you can deduct up to 50% of your adjusted gross income (AGI) this year (100% for farmers and ranchers) instead of the usual 30%-of-AGI limit.
15. Day camps: If your under-age-13 children attend a day camp while you (and your spouse, if married) work this summer, you may qualify for the dependent child care credit. However, the cost of overnight camp isn't eligible.
16. Estimated taxes: Check to see whether you're withholding enough income tax from your paychecks and adjust the amount if necessary to avoid owing an "estimated tax penalty" in 2016.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
Â© 2016, all rights reserved.