As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the planning challenge this year include turbulence in the stock market, overall economic insecurity, uncertainty about the new administration, and Congress's all too familiar failure to act on a number of important tax breaks that will expire at the end of 2016.

Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). For individuals, these breaks include: the exclusion for discharge of indebtedness on a principal residence; the treatment of mortgage insurance premiums as deductible qualified residence interest; the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older; and the deduction for qualified tuition and related expenses. There is also a host of expiring energy provisions, including: the nonbusiness energy property credit; the residential energy property credit; the qualified fuel cell motor vehicle credit; the alternative fuel vehicle refueling property credit; the credit for 2-wheeled plug-in electric vehicles; the new energy efficient homes credit; and the hybrid solar lighting system property credit.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax.

Here is a list of additional actions based on current tax rules that may help you save tax dollars if you act before the end of the year. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. Feel free to contact our tax specialists at Mierendorf and Co. to discuss which of these following actions may work for your situation:

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to set up a meeting to discuss year-end trades you should consider making.
• Postpone income until 2017 and accelerate deductions in 2016 to lower your 2016 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA, if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2016.
• It may be advantageous to try to arrange with your employer to defer, until early 2017, a bonus that may be coming your way.
• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don't pay your credit card bill until after the end of the year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2016, if you won't be subject to alternative minimum tax (AMT) in 2016.
• Estimate the effect of any year-end planning moves on the AMT for 2016, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes.
• Save on taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
• For 2016, the "floor" beneath medical expense deductions for those age 65 or older is 7.5% of adjusted gross income (AGI). Unless Congress changes the rules, this floor will rise to 10% of AGI next year. Taxpayers age 65 or older who can claim itemized deductions this year, but won't be able to next year because of the higher floor, should consider accelerating discretionary or elective medical procedures or expenses (e.g., dental implants or expensive eyewear).
• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
• If you become eligible in December of 2016 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2016.
• If you are thinking of installing energy saving improvements to your home, such as certain high-efficiency insulation materials, do so before the close of 2016. You may qualify for a "nonbusiness energy property credit" that won't be available after this year, unless Congress reinstates it.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Remember, not every strategy works for every taxpayer. Contact us at Mierendorf and Co. to discuss your year-end tax strategies.

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