2016 Year-End Planning Guide

Maximize contributions to your retirement savings plans

There are still a few weeks left in the year to adjust payroll deductions (or year-end bonuses) to contribute more to a 401(k), 403(b) or other tax-deferred savings plan. This could be especially valuable if your employer matches contributions. If you are self-employed, consider opening a solo-401(k) or SEP IRA. The 2016 limit on employee elective contributions to 401(k), 403(b) and 457 plans is $18,000. If you are age 50 or older this year, you are able to make an additional catch-up contribution to most plans of $6,000 to reach $24,000 total. If 2016 is turning out to be a lower-tax year where deductions are not as valuable to you, consider the Roth version of your employer plan for your retirement savings.

Clean out your closets and attic

Donating clothing, furniture or office and kitchen supplies to charity by the end of the year can be an effective tax reduction strategy if you itemize deductions and don’t need the items taking up space at home. If you expect to have more income and be in a higher tax bracket in 2017, consider waiting until early next year to make the gift to charity, when the deduction may be worth more to you. Keep receipts for non-cash contributions. If you are considering donating valuable items, plan ahead with your advisor. Certain contributions may require special attention and a qualified appraisal.

Think about your home

If you sold real estate during the year, review the specifics with your advisor or tax preparer to make sure there are no unexpected taxable gains on the property. Different rules apply to a primary residence or investment property. If you are considering a property sale next year, start organizing your history of capital improvements which could add to your adjusted cost basis and lower any taxable gain. If you have added insulation to your home, replaced windows and doors or installed solar power, you may be eligible for a property credit on your 2016 tax return.

Donate appreciated investments to charity

Consider donating appreciated stock or mutual funds to charity. If you have owned shares for more than a year, you may get two tax benefits: a deduction for the value of your donation plus avoiding the capital gains tax you would have paid if the position was sold. Don’t contribute a stock that has fallen in value. Instead, sell it and take the loss for your own tax savings- you can donate the proceeds to the charity. If you want to streamline your gifting going forward, a Donor Advised Fund may be an effective tool to reduce paperwork and manage recurring charitable gifts.

Gift to individuals

You may gift up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make the gift) without any gift tax consequences. You can also make payments of tuition or medical costs of another person as long as the payment is made directly to the billing institution. Larger gifts to a person may require you to file a gift tax return, though no tax may actually be due and transfers above the annual gift exclusion can provide longer-term benefits. Gifting may help reduce your eventual estate tax by removing future appreciation from your estate. Most individuals do not need to reduce their estate for Federal purposes as the exclusion amount is $5,450,000 per person in 2016. However, the Federal amount could change in the future. States may also assess estate taxes, often with lower exemptions, for example only $1,000,000 in Massachusetts.

Help fund an education

529 College Savings Plans offer a tax-favored way to invest for higher education expenses. If you are funding 529 college savings plans to children, grandchildren or others, those contributions count as gifts toward your $14,000 or joint $28,000 annual exclusion per recipient. If you would like to make larger gifts to seed an education, a special rule often called “superfunding” allows up to 5 times the annual exclusion gift into 529 plans without using any of your lifetime gift or estate tax exclusion. Please speak with your advisor about this strategy in more detail or if you are interested in establishing a 529 plan.

Evaluate a flexible spending account

If you use your employer’s Flexible Spending Account, you may need to use up any remaining balance by year-end to avoid forfeiture. Your employer may let participants have a grace period until March 15th of the following year to get medical treatments or submit expenses for reimbursement. Alternatively, you may be able to roll up to $500 of the account balance into the next calendar year. Employers can offer either option, but not both, or none at all. It is important to confirm with your employer if they have opted for the grace period option or the carryover option. If you need to use up a balance, look at as an option for eligible purchases. Now is also a good time to evaluate increasing or decreasing contributions into a FSA for 2017, depending on your anticipated expenses.

Optimizing a lower-income year

If 2016 will be a materially lower income year and you find yourself in a low tax bracket, take advantage of strategies to benefit from your circumstances. If you are in the 10% or 15% tax bracket there may be an opportunity to realize some long-term capital gains with zero tax liability. Converting an IRA to a Roth IRA or withdrawing earnings from a non-qualified annuity may also be effective ways to manage income taxes if you expect to be in a higher bracket in the future. If 2017 is likely to be a lower income year, you may want to defer withdrawals or portfolio turnover until next year.

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