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Year-End Tax Planning 2016

imagesThe end of the year is fast approaching. Time is running out to modify your finances to optimize tax savings. I will run down the more common ideas to reduce taxes. Keep in mind this is not a comprehensive review. Your facts and circumstances will determine what is best for you. Use this review as a guide to reduce your tax liability.


Most readers here have significant investments so we will start there. All adjustments to investments should have an economic reason beyond taxes. Reducing taxes is the goal, but the increased costs of selling can offset a portion or all of the benefit.

If you are not using an automatic tax loss harvesting program such as Betterment, now is the time to review your non-qualified (non retirement) portfolio. Mutual funds and stocks with losses can reduce the capital gains distributions of other mutual funds or ETFs. You can also report up to a $3,000 loss against other income on your federal return. Your state taxes will differ. In Wisconsin, for example, the loss against other income is limited to $500.

Be careful with the wash-sale rule. You cannot sell a stock or mutual fund at a loss and buy it back immediately. The wash-sale rule says losses are disallowed if you buy a substantially identical security within 30 days of the sale, before or after. A different mutual fund is not a substantially identical security, but an S&P 500 index fund swapped for another S&P 500 index fund is. Selling an S&P 500 index fund and buying a growth & income fund or a broader index fund is not substantially identical.

The bond market has suffered serious losses over the last few weeks. Realizing some of those losses might be the right choice for you. Selling a longer dated bond mutual fund for a shorter term fund avoids the wash-sale rule. Skipping on bonds in this low rate environment where interest rates are rising might be a better idea from a tax and personal viewpoint.

The long-term capital gains tax rate peaks at 20%, but beware the Medicare 3.8% surtax, which is in addition to the capital gains rate for high earners. Selling losses to offset gains can have a positive impact on your tax liability.

Stocks have had a hell of a run the last 7 or so years. For securities held longer than a year you can deduct the full value if you donate the stock or mutual fund to a tax-exempt charity. There are negative consequences on donations to a charity for items with an unrealized loss.

Tax loss harvesting is more important than ever this year as the stock market rally has many people wanting to lock in some gains. Inside a retirement account it is easy to do. Non-qualified accounts create a tax event. Your personal circumstances will dictate your actions. Selling bonds and bond funds to the extent you want to lock in stock market gains is a good place to start planning.

Also, beware new investments into mutual funds at year-end. Mutual funds and ETFs frequently have outsized distributions of dividends and capital gains in December. Buying prior to a distribution subjects you to the tax on the distribution although your account value is unchanged. This is not an issue inside a retirement fund, but outside retirement funds it can cause serious tax pain.

Itemized Deduction

Starting at the top of Schedule A we have medical deductions. Medical deductions need to exceed 10% of adjusted gross income (AGI) to count; 7 ½% for folks 65 or older on December 31st. If one spouse is 65 or older, both get the 7 ½% threshold. This is the last year for older taxpayers to enjoy the 7 ½% threshold on medical deductions; it goes to 10% on the 2017 tax return filed in the spring of 2018 for everyone.

Be sure to use funds remaining in employer plans (medical and daycare) so they are not lost. If you have an HSA, be sure to contribute the max allowed. If given the choice, fill the HSA savings account from withholding through payroll.

Elective medical procedures or medical expenses you can time offer a tax opportunity. Bunching medical expenses in one year can reduce your tax liability. The difficulty in reaching the deduction threshold means planning is more important than ever in this area.

Next we address deductible taxes. When you pay your state income taxes determines when they are deducted on Schedule A. Sending your final state estimated tax payment in December allows you to deduct that expense in 2016 as an itemized deduction. There is a game you can play with state taxes as well. You can significantly overpay your state tax estimated payment in December and deduct it for 2016 on your federal tax return, thereby lowering your federal liability. In a few months you have the money back as a state refund. This strategy works best if you have a significant income change in one year where the tax bracket will be higher, but lower in the next. Careful planning is needed.

5015273439_165206c092_oProperty taxes can be doubled up one year to take advantage of itemizing when you can’t itemize if you pay property taxes separately each year. To do this you pay your property taxes in January and then again in December of the same year. The goal is to itemize one year and take the standard deduction the next, thereby increasing your deductions over a two year period. Be sure to include as many itemizable expenses as possible in the year you double up property tax payments to maximize the benefit. There is one warning. This idea works poorly in some states, like Wisconsin (are we seeing a pattern with Wisconsin). In Wisconsin you get a property tax credit of up to $300 per year on property taxes actually paid that year on your primary residence. By doubling up one year and skipping the next you lose the $300 credit every other year for Wisconsin. This digs into the value of the strategy and may make it unusable. I don’t cover state taxes here because there are too many to review. Be sure to include state tax issues when you tax plan with your federal return.

Finally, we discuss charitable contributions. If your income fluctuates or if you are in retirement and required to make IRA distributions, you can plan your giving to reduce the tax burden. Mixing and matching contributions to charity with income is a great way to mitigate taxes over a lifetime. Contributions to charity from an IRA may work for some older taxpayers. Also, be sure you get the contribution to charity in before year-end for it to count. Waiting until the last second might be an issue. Payment with a credit card counts as a deduction the day it posts.

All this goes out the window if you are subject to the Alternative Minimum Tax. We will leave the bulk of the AMT discussion for another day. What I want to warn is that certain items are not allowed on AMT. State taxes are a biggie added back if you itemize and the standard deduction and personal exemptions are also not allowed. AMT turns your planning on its head. If you suffer AMT you want to accelerate income and minimize deductions, saving them for a future year when possible. Someday I’ll write at length about AMT. But because it is such a massive issue it would take plenty of space so I need to find the right time and venue. Maybe I’ll create a side track to The Wealthy Accountant to handle these more extensive issues in tax law.


Medicare premiums are based on income. Taking a larger distribution from retirement accounts in one year and a reduced amount every other year could yield a lower premium every other year. Discuss the matter with your tax professional to see if there is a planning opportunity.

Business Owners and Landlords

Now is the time for business owners and landlords to review their books for lost opportunities. Verify all expenses are included, especially non-cash deductions. Meals and incidentals for overnights are deducted as either the actual expense or the per diem. For many the per diem is worth more. The per diem is $57 for most locations in the US, $63 for the transportation industry.  More details on the per diem are here.

Other non-cash deductions provide plenty of opportunity to reduce taxes. Mileage is the most common. The business mileage rate for deduction is $.54 per mile in 2016. This adds up fast! A trip to visit clients counts; so does a visit to the accountant to review the business and business taxes (same goes for landlords). I see way too much missed in this area. Your records must be contemporaneous which means you need to have your mileage log in order at the time you file your taxes. Now is the perfect time to review your schedule to verify you did not miss any deductible miles.

Business owners and landlords can plan their income. Revenue can be delayed if it saves tax dollars. Capital purchases might be the perfect solution to a high tax bracket. A purchase today could be worth more if your income is higher this year. Small business owners can expense capital purchases using Section 179 in most cases.

Landlords need to remember the de minimis rule for capital purchases. Business owners can use the same rule to cut their income. This rule is a godsend for landlords, however, who cannot use Section 179 and must depreciate capital expenditures. $2,500 can be expensed under the de minimis rule as long as the election is made on a timely filed tax return. Most stoves and refrigerators can now be deducted as long as the purchase cost is $2,500 or less. Be sure to make the election and list the items separately. Certain improvements under $10,000 can also be deducted as a repair expense with an election.

Final Shot

A year-end tax planning guide can only go so far. In my office we send a questionnaire to clients so we know which additional questions to ask. The tax code is just getting too big to cover it all by voice. Our questionnaire doesn’t even cover many of the topics in this post. What I put on this page is planning, not preparation. There is a difference. A conversation with a qualified tax pro at this time can pay for itself many times over.

Don’t be afraid to pay your accountant. I know it is self-serving, but if we don’t get paid, everyone wants our limited time. It’s Free! But time isn’t free to the accountant. We want to help, but we need to cover our overhead and justify our time investment. Besides, good accountants charge for their time; I can’t vouch for the ones who are free.

If you have a specific question, feel free to leave it in the comments section below. I’ll do my best to answer it. And it’s (ahem) FREE!


Sunday 4th of June 2017

Great info. Any additional proactive tax planning advice for someone who will be divorcing in a community property state (Texas) with no debt (other than mortgage) and expecting joint custody of school age children? Each parent will claim one dependent and No need for child support or alimony needed from either party. I read your post, Your Money or Your wife. Surprisingly not divorcing over money issues.

Jason Patel

Sunday 27th of November 2016

Keith, just found your blog and as a fellow CPA I'm in heaven! I just learned about the appreciated investments deduction rule, and my question is this: if I donate appreciated securities to my church, can I immediately repurchase those same securities? There isn't a "wash sale" sort of rule that applies here that I'm aware of, but I'm afraid my Merrill broker may apply one. Is my fear misplaced?

Keith Schroeder

Sunday 27th of November 2016

If you donate appreciated securities the wash sale rules don't apply. The wash sale rule applies to securities sold at a loss only. If your broker screws up the 1099-B it is easy to adjust on the tax return and tell the IRS why you are making the adjustment. There is nothing in the tax code or regulations I am aware of denying you the right to donate appreciated property to a charity and buy a similar replacement. The benefit, of course, is you now have a higher basis on the stock while amping your charitable contribution.

Dean in Denver

Wednesday 23rd of November 2016

Regarding the HSA contribution via your employer, would the same idea apply if you are self employed (no separate EIN)? Specifically, should i make the HSA contribution out of my business account rather than my personal account...or does it not make a difference? Dean

Keith Schroeder

Wednesday 23rd of November 2016

Makes no difference, Dean. A sole prop does not have payroll to the owner which is where you want the HSA savings account investment to come from. Personally I would take from personal vs. mixing it with business. Now if you are an LLC treated as an S corp you get a payroll check as owner and want the HSA to come from there.

Renard Sessions

Wednesday 23rd of November 2016

On tax loss harvesting and wash selling VTIAX (80% developed market foreign 20% emerging) and buying a different ratio (say 50% of each) of VTMGX (developed market) and VGAVX (emerging market) a stupid idea likely to land me in poor graces with the IRS? Or am I brilliant and should get prizes and fame for my cleverness?

The point of all this being I'm closing out a sligtly losing position in VTIAX from a taxed account and want to buy cheap international exposure in an IRA account. Thanks and good eating this week!

Keith Schroeder

Wednesday 23rd of November 2016

The wash-rule does not apply to the transaction you list because it is not substantially the same. You get to claim the loss and use the new basis on the purchase of VTMGX and VGAVX. The IRS will love you for your awesome move, but don't expect a card or anything. They are like that.

John Mansolillo

Monday 21st of November 2016

What would you recommend to someone who, thanks to your wonderful advice, plans to pay no federal tax in 2017, but this year has some tax. I'm trying to not lose the tax credits i'm eligible for next year (savers, child, education). Is it worth "paying" more tax next year in order to have the credits get me to a zero or refund status? for example, i could make some 403b retirement contributions in December, instead of January.


Keith Schroeder

Monday 21st of November 2016

If you pay no tax next year, but have a tax this year, you want to take deductions this year. Once you drive your tax rate to zero, including tax credits, you then want to fill Roth IRAs. The Saver's Credit is non-refundable, but the child tax credit could be refundable. Up to $1,000 of the American Opportunity Credit is refundable. A lot of credits, especially the ed credits, have a tendency to eliminate income taxes. In those cases you have to focus on the refundable credits and switch retirement investments to Roth IRAs before filling the remainder of traditional products. I hate the idea of putting money into non-Roth retirement plans when your tax bracket is zero. Another consideration is non-qualified accounts using tax loss harvesting. Hope this helps, John.