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November 11, 2016

Tax Planning Opportunities for the Remainder of 2016

by Tara Cordato

As the end of 2016 approaches, there are several tax planning moves you can make to minimize your tax liabilities and possibly minimize your tax liability in the future. Not every option will work for every taxpayer; however with a little planning you may be able to save a lot of money.

When should I recognize Income and Expenses?

Answer: Traditionally, in tax planning it is best to accelerate expenses and defer income. This keeps your income as low as possible in the current year. There are different ways to achieve this, such as prepaying expenses like property taxes or business expenses. If you own a business, you may purchase assets before year end and taking advantage of Section 179 depreciation and bonus depreciation. There are times when this strategy does not make sense, for example, if you expect your 2017 income to be substantially higher than your 2016 income. In this case, you may want to recognize as much income as possible in the current year and delay the expenses until the following year.

Should I convert a portion of my IRA to Roth IRA?

Answer: If you are in a low tax bracket, you may be able to convert a portion of your IRA to a Roth IRA at little to no extra tax. When you convert your IRA to a Roth IRA, you pay tax on the amount of the conversion in the year of the conversion. The money in your Roth IRA will then grow tax-free for the remainder of your life and pass to your heirs tax free. Distributions from a Roth IRA are tax free and there are no required minimum distributions.

Should I prepay my state taxes?

Answer: If you are not in AMT (Alternative Minimum Tax), then there is potential for federal tax savings if you pay your 4th quarter estimate or estimated state balance due by 12/31/16.

How can I get the most benefit from charitable giving?

Answer: There are several options when it comes to charitable giving. If you are in a high income tax year, you may want to consider opening up a Donor Advised Fund. With a Donor Advised Fund, you receive the deduction in the year of the contribution. The money stays in your fund until you decide to distribute it to charity, however this can be done over time. Another charitable giving strategy is donating appreciated stock. You will receive a deduction for the fair market value of the stock without paying the tax on any gains. The final charitable giving strategy to consider is donating to the California College Access Fund. This will give you a 50% California tax credit for your 2016 contribution in addition to the federal tax deduction.

It can be extremely valuable to meet with your qualified tax advisor to see which approach is right for you. The team at R&A would be more than happy to work with you on your tax planning!

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