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Tax Tips for Saving on Your 2016 Tax Return

Ines Zemelman, EADec-30-2016

There are many reasons your 2016 tax bill might increase. The allowed amount for exemptions decreases as your adjusted gross income (AGI) increases over certain amounts, and is different for different filing statuses. There is also the 0.9% additional tax for Medicare and additional taxes of 3.8% of net income from investments (i.e., income from investments minus related expenses) applicable to certain taxpayers. The threshold that triggers these additional taxes varies depending on filing status. It is important to determine if you think your income will exceed these thresholds, and increase either your withholding for the remainder of the year, or increase your estimated tax submission for the 4th quarter (which is due before the 15th of January) to avoid penalties for underpayment.

The penalty amount is assessed if your taxes paid (through withholding or estimated tax payments) are under 90% of the current year, 100% of prior year, or 110% of prior year if your adjusted gross income was over $150,000. If necessary, avoid the penalty by increasing your withholding amount for the remainder of the year. Additional tax withheld is treated like it was paid in evenly throughout the year, so it is easy to “catch up”. If you pay estimated taxes, you can increase your 4th quarter payment, which is due by January 15th.

The two primary ways you can lower your tax bill are to either increase deductions, or decrease the amount of income that is taxable. Following are some ways you can minimize your tax bill for 2016.

Charitable Contributions

Make some additional contributions to charity of either cash or of property, such as unneeded clothing and household items. One particularly good way to do this is by making donations of property that have appreciated, especially securities. When you do this, your donation is valued at the fair market value as of the date you made the gift. This is a good approach since by donating the securities you will not owe taxes on any capital gains like you would by selling it first and making a donation in cash. If you choose to do this, first talk with your advisor or broker to determine the best securities to donate. They will then handle transferring them to your preferred charity for you.

Retirement Savings

Make additional contributions to your SEP or traditional IRA. The law allows you to do this up until the 15th of April, 2017 and apply it to your 2016 taxes.

Medical Expenses

Pay your premiums for health insurance and pay other expenses for medical in 2016 rather than waiting for next year. In 2016, the medical expense threshold is set at 10% of adjusted gross income (7.5% if 65 or older).

Mortgage and Property Taxes

Make your January mortgage insurance payment, mortgage payment, and your 2017 property tax payment in December. You will need to ask your mortgage company to do this if you use an escrow account to pay these expenses.

Medical Savings

Contribute to your Health Savings Account (HSA) or “cafeteria plan” prior to the conclusion of the year. Contributions for individuals in 2016 are limited at $3,350 (families are limited at $6,650) to cover dependent care or medical expenses. Taxpayers who are at least 55 years old can contribute another $1,000. Medications sold over the counter can’t be paid using HSA contributions unless they are prescribed by your doctor. These contributions will reduce taxes withheld on your W2, along with self employment taxes since an HSA lets you essentially pay your medical expenses using pre-tax money rather than after-tax money. If using a flexible spending account (FSA), make sure you use all contributions prior to the end of the year, since any amount remaining in the account is forfeited. If allowed by your employer, you can let as much as $500 carry over to the next year. If you can’t use all of the money in your account, make sure to check and see if your employer allows a carryover.

Sell Securities at a Loss

Offset capital gains that have already been realized by selling securities that have an as-yet unrealized loss. Capital losses that exceed capital gains can be deducted against regular income up to a limit of $3,000. Any capital losses in excess of this amount are allowed to carry forward indefinitely and reduce gains and any other taxable income in the future. Securities with gains should be sold in 2017, not 2016, unless you have large losses you’ve realized already to offset the gain.

Retirement Plans

Contributions to tax deferred retirement plans, such as SEP plans, 457 plans, 403(b), and 401(k) plans can be increased before the year ends. These contributions will reduce salary and income from self-employment, which in turn reduces taxes.

Defer Income

Ask to have any pay raise, bonus, or income from self employment deferred into 2017. That is, unless you think you will be in one of the higher tax brackets in 2017.

Use More of the Dependent Care Credit

Pay any expenses for dependent care in 2016. This will increase your credit for dependent care. Remember that credits will decrease your tax, and deductions decrease your income that is subject to taxation.

Student Loans

Pay your 2017 interest on student loans in 2016. This deduction is from your adjusted gross income (AGI). To take the deduction, though, you have to be responsible for payment of the loan.

Canceled Debt

Tax law allows you to exclude canceled debt for a principal residence (qualified).

Pay Tuition

Pay college fees and tuition for 2017 for your spouse, dependents, and yourself in 2016. These expenses are deductible from your AGI unless they are for business purposes (where they would be a miscellaneous deduction). Instead of the deduction, you might be able to take a credit. A tax credit will decrease your taxes by a greater amount than deductions will. It is good to remember that the American Opportunity Credit is a 40% refundable credit.

Adjust Withholding

If your refund was large last year, but your tax situation has not changed significantly, consider having less tax withheld. There is a calculator on the IRS web page to help calculate the proper amount of withholding.

Pay Attention to Minimum Distributions

Except if a taxpayer is still working, they must take minimum distributions each year from their tax deferred plans for retirement and traditional IRAs once they reach the age of 70 ½. This minimum distribution amount is calculated by adding the balance of all IRA accounts as of the prior year’s end, and multiplying it by a mortality factor determined by the IRS. The administrator of your IRA or retirement plan can calculate the minimum distribution for you. The deadline for the first distribution is April 15th of the year following the year the taxpayer turns 70 ½. The distribution for future years is required to be taken before December 31st. Taxpayers who do not withdraw the minimum will be required to pay penalties of half of the amount that was required to be withdrawn, but was not.

Donate Minimum Distributions to Charity

Minimum distributions from traditional IRAs can be designated to go to charity, in whole or in part. This will reduce the taxable amount, but remember that you can’t take a charitable contribution deduction in addition to the donation of the distribution. Also note that the contribution has to be made to the charity by the administrator of the plan directly based on your instructions. If the distribution is first sent to you, it is taxable. If you then decide to donate a portion to charity, it then would need to be treated as one of your itemized deductions. Donations directly from minimum distributions are most beneficial to taxpayers who use the standard deductions rather than itemize. If you are considering this option, consult your account administrator.

Energy Expenditures

Take advantage of the energy credit by spending money on energy related items in 2016. The credit maximum is $500 total from 2006 through 2016, but if the full amount has not yet been used in previous years, the remainder can be used in the 2016 tax year. The energy related items must have been installed in the taxpayer’s primary residence, which must be in the United States, meet government requirements for energy efficiency, and have a lifespan exceeding 5 years. The credit must be substantiated with receipts and the Certification Statement from the manufacturer. More information on ratings and qualifying items can be found at the Energystar web site. Items that qualify are:

- Insulation - 10%

- Exterior skylights and windows - 10%, $200 maximum

- Doors (exterior) - 10%, $200 maximum

- Roof, either metal with coating, or cooling granules on asphalt - 10%

- Advanced circulating fan - $50 maximum

- Oil, propane, or natural gas furnace or water heater - $150 maximum. It is required to have an efficiency of a minimum of 90%, or a minimum 0.92 “energy factor”.

- Water heater (heat pump) - $300 maximum

- Central air conditioning and heat pump, propane, natural gas, or oil system - $300 maximum

- Biomass stove with an efficiency rating of 75% minimum - $300 maximum

State Sales Tax

The taxpayers who happen to live in one of the states that does not have a tax on income can deduct their sales tax paid. Taxpayers who have made enough purchases to have a deduction of sales tax exceed their state tax on income paid can also take the sales tax deduction. There are tables at the IRS web site to help compute typical sales tax paid, or if you use tax software it will automatically calculate it. If you have made large purchases (such as a boat, car, furniture, appliances, etc), you can choose to deduct those amounts of sales tax rather than the standard sales tax amount.



 Ines Zemelman, EA is the founder of Taxes for Expats
   She may be reached at: +1-646-397-2887
   Email: [email protected]
   Web site: www.taxesforexpats.com