As we enter the fourth quarter and with year-end rapidly approaching, we would like to present you with some year-end tax planning recommendations. The window of opportunity for many tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now while there is still time to affect your bottom line for the 2016 tax year.
Most of us do not have access to a $900 million loss carryforward or the use of a family foundation to pay our personal expenses, so our tax savings will be because of little moves. However, taking maximum advantage of a number of seemingly-small moves can still save a significant amount in federal and state income taxes.
Maximize All Retirement Plan Contributions. For 2016, the maximum contribution to 401(k) and similar plans is $18,000. If you are over 50, you can contribute an additional $6,000 for a total of $24,000. Since these contributions are done through payroll, you will need to adjust your withholdings if you wish to increase your contribution.
If you cannot afford to contribute the maximum amount, at least contribute enough to maximize your employer’s matching contribution. If your employer matches your contribution up to 3% of your salary, make sure you are contributing at least 3% of your salary. Your employer match is “free money” and you should always attempt to garner that benefit.
Maximize Contributions to College Savings Plans. Contributions to the College Savings Plan of Maryland are deductible up to $2,500 per beneficiary per owner on your Maryland state income tax return. A family with two children could set up four accounts, two owned by the father and two owned by the mother, and they could deduct a total of $10,000 from their Maryland taxable income. Excess contributions can be carried forward and used in future years. All gain withdrawn from 529 plans are tax-free if used for qualifying education expenses.
Maximize Contributions to Health Savings Accounts. High-deductible health insurance plans coupled with Health Savings Accounts can generate significant savings, especially for those not covered by employer-provided health insurance or those who are self-employed. Individuals can contribute up to $3,350 in 2016 and families can contribute up to $6,750. These contributions are tax-deductible and withdrawals from HSA accounts are tax-free if used for qualified medical expenses. Unlike flexible savings accounts, HSAs are not a “use it or lose it” proposition; unused amounts can be carried over to future years.
In addition, health insurance premiums are tax-deductible for self-employed individuals as long as neither spouse is covered by an employer-provided health insurance program.
Remember to Take All Required Minimum Distributions. All IRA (except Roth IRAs) accounts require minimum distributions by age 70 ½ and non-spousal inherited IRAs may require earlier distributions. Failure to take proper minimum distributions will result in a 50% excise tax on the untaken portion of the minimum distribution. The minimum distributions rules for 401(k) plans and IRAs are different if you are still working at age 70 ½; you must still take RMDs on IRAs but not on your current employer’s 401(k) plan.
Maximize Charitable Contributions. The fourth quarter is a time when many people review their charitable contributions for the year. Contributions can be cash or non-cash so if you haven’t worn that plaid sports coat or polka dot dress in two years, you may want to consider giving it away. Most major charities such as Salvation Army or Goodwill Industries have guidelines as to the charitable value of various household items and clothing. Non-cash contributions in excess of $500 per year must be reported to the IRS on Form 8283, Noncash Charitable Contributions.
We will discuss additional year-end tax planning suggestions in our November newsletter.