With 2016 almost behind us, now is the time to think about what you can do to reduce your tax bite:
If you (or someone you know) is 70 1/2 or older and have an IRA account, you must take a required minimum distribution (RMD) or be faced with a 50% tax penalty. If you donate money to charity, you can choose to have the donation come directly from your IRA (up to $100K per year). By doing so, the distribution does not count as income on your tax return. While the donation isn’t deductible, many taxpayers in that demographic don’t itemize, so it’s more advantageous to get the tax benefit by donating straight from the IRA.
If you use your vehicle for business, you must keep a mileage log for both total AND business miles driven, or the IRS can disallow your deduction. A tip I give to my clients is to always schedule a vehicle service (oil change, tire rotation, etc.) around December, so that you have an IRS-approved documentation of your vehicle’s annual odometer reading.
Any donation you make to a qualified charity before December 31, 2016 (includes cash, check OR credit card) will be deductible on your 2016 tax return. If you donate $250 or more to an individual charity, make sure you receive an acknowledgment letter or statement from the organization.
Think about donating appreciated assets (such as stocks, mutual funds, real estate, etc.) to charity instead of cash before the end of 2016. You can deduct the Fair Market Value of the asset AND not have to pay Capital Gains tax.
If you have an Individual Retirement Account (IRA), you have until April 17, 2017 to contribute up to $5,500 ($6,500 if you’re age 50 or older) and have it count for tax year 2016.
If you have a high-deductible health insurance plan, think about setting up a Health Savings Account (HSA) before year-end. If you have a single plan, you can contribute up to $3,350 ($6,750 for a family plan). If you’re age 55 or older, you can contribute an additional $1,000. The contributions are tax-deductible, and you can use the monies to pay for IRS-qualified unreimbursed medical, dental and vision expenses. It’s not a “use-it-or-lose-it” plan– the funds stay in your account year after year.
If you’re self-employed and need more business deductions for 2016, think about stocking up on supplies, purchasing new equipment, or pre-paying some expenses like advertising or insurance. As long as you make these purchases by December 31, 2016 by either cash or credit card, you can deduct them in 2016.
Tax Tip for teachers: Start gathering your documentation for all of your out-of-pocket classroom supplies! Unreimbursed employee expenses (such as classes for your credentials, dues, etc) are tax deductible as employee business expenses, which, except for the first $250 (which is deducted on the 1040), have to exceed 2% of your adjusted gross income to even be deducted. Here’s the tip: Unreimbursed classroom supplies, like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which are NOT subject to the 2% floor) as long as you get a donation acknowledgment from your school.