It won’t be long before the Thanksgiving and Christmas holidays race by, giving way to a new year. And shortly after the calendar turns to 2017, tax time will be upon us once again. I always recommend considering your tax position this time of year, because it’s not too late for some last minute tax planning.
Depending on your unique situation, options are available to minimize your year-end tax bill. Moreover, if you operate a business, you may be able to accomplish this feat while simultaneously upgrading your firm. Several strategies that I commonly recommend are explained below, and they may work for you as well.
Accelerate/Defer Your State Income Tax Deduction
If you pay Louisiana estimated tax, you may be aware that a fourth quarter voucher is due January 15, 2017. However, the timing of this payment presents an opportunity to accelerate/defer an itemized deduction (i.e., taxes paid to state or local municipality) as described below:
Accelerate Deduction. Issue and deliver (i.e., postmark via USPS) your payment by December 31, 2016 to accelerate your itemized deduction into 2016.
Defer Deduction. To defer the deduction until 2017, issue and deliver your payment after December 31, 2016 (i.e., between January 1 – January 15, 2017).
Contribute to a Roth IRA
A Roth Individual Retirement Account (IRA) is a great product to use as part of your retirement plan, as it provides tax-free accumulation of investment earnings with minimal compliance burdens. Contributions are made post-tax (i.e., no deduction is realized upon depositing funds), while distributions in retirement are tax-free.
The complexity of a Roth IRA often arises in determining eligibility (on an annual basis), as IRS restrictions include the following:
Modified AGI Limit. Your ability to make a contribution to a Roth IRA depends upon the income reported on your annual tax return (more specifically, your Modified Adjusted Gross Income). For 2016, the income phase-out range is $117,000 – $132,000 for single filers, and between $184,000 – $194,000 for married couples filing jointly. In other words, if your Modified AGI exceeds $132,000 (single) or $194,000 (married filing jointly), you will not be eligible to make a Roth contribution.
Compensation Limit. In addition to the MAGI limit, your ability to make a Roth contribution may be limited to the amount of taxable compensation reported on your tax return. The IRS defines compensation as wages, salaries, tips, professional fees, bonuses, commissions, self-employment income, military differential pay, and taxable alimony. For 2016, your Roth contribution limit is the lesser of $5,500 or your taxable compensation.
Purchase Machinery/Equipment & Receive Business Deduction
If your business is in need of machinery or equipment, making the purchase on or before December 31, 2016 can result in substantial tax savings due to the $500,000 deduction limit and $2,000,000 purchase limit. On December 18, 2015, the House and Senate signed the “Protecting Americans from Tax Hikes Act of 2015” (PATH) into law. Under this legislation, the $500,000 deduction limit ($2,000,000 purchases limit) of Section 179 was retroactively extended for application in 2015. The bill extends the increased deduction/purchase limits through 2016.
The PATH act also extends 50% “bonus” depreciation through 2019, and it is available for new equipment placed in service during 2016 and 2017. In 2018 and 2019, “bonus” depreciation is phased-down to 40% and 30%, respectively. Check out additional resources for this topic at the links below:
– Depreciation Update: Section 179 & Bonus Depreciation