It’s beginning to look a lot like Christmas. The highway is crowded, the palm trees are ringed with lights and there are reports of snow in Islamorada. While everyone is getting ready for the upcoming holidays, your friendly, neighborhood Enrolled Agent is keeping up-to-date with all the new tax laws to help you minimize your tax bills for 2016 and beyond. Here are six things to ponder before this year ends:
Make a decision about health insurance. The Affordable Care Act remains the law of the land and enrollment for 2017 is now open. 2016 is in the books, but taxpayers who do not have qualifying health insurance for 2017 are subject to a penalty — roughly 2.5 percent of income or $695 per uninsured person — so the time to act is now. For those who are currently enrolled, check the assumptions you made when you applied last year as changes can have a material impact on your tax bill.
Open an Individual Retirement Account (IRA) and/or Health Savings Account (HSA). These tax-advantaged accounts are great ways to save while helping cut your tax bill. While they can be funded later, the accounts must be open and active this year for a contribution to count for 2016. Contribution limits are unchanged, so individuals can put up to $5,500 into an IRA ($6,500 for those 50 and over) and $3,350 into a HSA for this year.
Convert a traditional IRA to a ROTH IRA. Converted funds are taxable at current rates, so if you had a down year, or if you think rates are going up, this may be a good time to do a conversion. Pay taxes on the money now and avoid them when you take the money out in retirement. Of course, always seek the advice of your financial advisor to make sure the transaction is done properly to avoid paying a tax penalty.
Harvest some capital losses. Since capital losses are capped at a net of $3,000/year, many taxpayers have large losses rolling forward, waiting to be used in the future. Consider selling appreciated stocks before the end of this year and offsetting those gains with existing losses. If you really like the stock, you can always buy it back later and reset your basis for future tax benefits.
Make energy-efficient improvements to your home. The Residential Energy Tax Credit is set to expire on December 31 so if you’ve been thinking about installing hurricane windows or making other “green” improvements to your home, now is the time to act. For the particulars, see the instructions for IRS form 5695.
Give, give, and give some more. For taxpayers who itemize, gifts to qualified charities are tax-deductible and can cut your tax bill. (Gifts to your tax professional are not deductible but are always appreciated). Check the status of a charity on the IRS website by using the ‘Exempt Organizations Select Check Tool’ and make sure to ask for a contemporaneous, written receipt for tax purposes
One great way to give, for those over the age of 70 ½ with retirement accounts, is through a Qualified Charitable Distribution (QCD). This is accomplished by sending your Required Minimum Distribution (RMD) straight to a qualified charity to keep it out of your income and avoid paying taxes on the distribution. It basically cuts the IRS out of the deal, so it’s a big win for both the donor and the recipient. You can give up to $100,000 through your QCD, and that’s a great way to be a blessing to someone while taking a bite of out your tax bill.
If this all sounds complicated, that’s because it is, and that’s why you need a tax professional in your corner. We keep up with all this stuff so you don’t have to. Contact the office today to schedule a tax planning appointment so we can review your specific situation in detail. Besides, you deserve a break from all that holiday preparation.
Jerry Gaddis is Founder & CEO of Tropical Tax Solutions, a full service firm headquartered in Key Largo offering Tax Consultation, Preparation and Representation services. Mr. Gaddis, a Dave Ramsey Endorsed Local Provider, is Enrolled to Practice Before the Internal Revenue Service and a Fellow in the National Tax Practice Institute. He earned degrees from the University of Florida and the Crummer Graduate School of Business at Rollins College in Winter Park, FL. He’s been in the tax business since 2004 and you can reach him at www.TropicalTax.com .