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Individual Tax Planning Strategies for Year-End – Part II

piggy-bank-2This is the follow-up to our previous blog on how to strategize for year-end and 2017 by utilizing a number of tax planning tips and considerations. As mentioned in Part I, it is often a good idea in general to review the year’s tax information, taking note of any personal and business-related items that could impact your tax returns for the upcoming year. This portion of our tax planning blog will focus on miscellaneous individual tax planning considerations. For information related to business and investment considerations, please see Part I.

529 education savings plans provide great tax advantages and enable you to set aside college funding for your children, grandchildren, or other designated beneficiaries. 529 Plans are administered by states, and provide the greatest benefits to in-state residents. New Yorkers can deduct up to $10,000 of contributions annually from their state taxable income. Earnings in 529 plans are not subject to state or federal tax, and withdrawals are tax-free when used for the beneficiary’s educational expenses, which typically include tuition, books, room and board, technology services and equipment, and other fees.

IRS guidelines specify that individuals at the age of 70 ½ or older are required to withdraw a minimum amount from their retirement accounts each year. This requirement is referred to as the required minimum distribution (“RMD”), which is the minimum percentage of the account that those aged 70 ½ or older must take from their IRA, 401(k), SEP IRA, SIMPLE IRA or other qualifying retirement plan accounts (Roth IRAs do not have RMDs). For those turning 70 ½ this year, there is an option to defer the first RMD to April 1, 2017, so discuss the timing with your investment advisor and CPA to find a strategy that works for you. It should also be noted that you can withdraw more than the minimum amount required under this rule if you wish, but it will not count against the RMD for future years.

Making annual gifts and charitable contributions can serve a number of tax planning purposes, and can be used to your advantage when approached the right way. A simple yet effective estate planning tool is the annual gift tax exclusion. For 2016, up to $14,000 may be gifted to any individual without creating a taxable gift or a filing requirement. Such annual gifts reduce your taxable estate, transferring assets directly to descendants rather than through the estate as would happen at the time of death—a simple move that over the long run could save your estate from paying substantial estate taxes.

For individuals over age 70 ½ who are required to take RMD’s, perhaps consider making a “qualified charitable distribution” this year instead. Instead of taking the RMD, you can direct the trustee to make up to $100,000 of contributions from your retirement account directly to charitable organizations. These contributions count toward the annual required minimum distribution, but are not treated as income to the taxpayer. You would not get a charitable deduction on your tax return for these qualified charitable distributions, but by lowering your overall income you may fall into a lower tax bracket and increase the deduction you get for medical expenses, investment fees, and other itemized deductions.

It’s worth noting that certain “life events,” if they occur before year-end, almost always will affect your taxes for the calendar year in which they occur. These include but are not limited to events such as marriage, having a child, buying or selling a home, retirement, receiving a career promotion, and receiving an inheritance.

For a list of the notable tax filing due date changes that will take effect in 2017, please refer to our table in Part 1 of this blog. We recommend contacting your tax advisor directly with any inquiries related to filing dates that may affect you.

As noted in Part I, December is the time to review your tax information for the year-to-date to identify the items that are new or that have changed substantially from the prior year. These factors will affect forecasting for the year-end and the upcoming year. For example, if you are not subject to the alternative minimum tax (AMT), we often suggest prepaying state income taxes and real estate taxes to reduce your federal liability for the current year.

Our experienced staff of professionals at FF&F can work with you to provide a thorough tax projection as well as to offer advice on any number of tax concerns and considerations you may have. To discuss your year-end tax planning strategy, or for more information, please contact us at info@fffcpas.com or (212) 245-5900.

John Gontijo, CPA, MBA, has been at FF&F as a Senior Tax Accountant for 4 years. He has over 10 years of experience with high net worth individuals, small businesses, and international taxation.  Prior to joining FF&F, he worked for a niche CPA firm in NYC which specialized in inbound U.S. tax matters for German, Swiss, and Austrian clients, including Offshore Voluntary Disclosure Programs.