Here are some things you might want to do before saying goodbye to 2016.
What has changed for you in 2016? For example, did you retire or sell your house? If notable changes occurred in your life, then you will want to review your finances before this year ends and 2017 begins. Even if your 2016 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.
If you are retired and older than 70½, remember your Required Minimum Distribution (RMD). Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs and 401(k), 403(b), and profit-sharing plans by December 31. The IRS penalty for failing to take an RMD equals 50% of the RMD amount that is not withdrawn.1
If you turned 70½ in 2016, you can postpone your initial RMD from an account until April 1, 2017. The downside of that is that you will have to take two RMDs next year, both taxable events – you will have to make your 2016 tax year withdrawal by April 1, 2017 and your 2017 tax year withdrawal by December 31, 2017. 1
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your adjusted gross income, plus any non-taxable interest income you earn, plus 50% of your Social Security income surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.2
Give some thought to gifting. How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2016 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.3
If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.
If you donate appreciated securities you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2016, you may be able to claim a partial state income tax deduction (depending on the state).4,5
Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2016 and 2017. So, as an individual, you can gift up to $14,000 to as many people as you wish this year. A married couple can gift up to $28,000 to as many people as desired in 2016 and 2017. (Unfortunately, the IRS prohibits a current-year income tax deduction for the value of a non-charitable gift.)6
Take a look at other tax moves you can take. Tax-loss harvesting, the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains can be good for your bottom line. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.7
In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.7
Another thing to look at is where you keep your assets. Tax-efficient asset location is an oft-ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts and your most tax-efficient securities should be held in taxable accounts.
The last thing to do is consider the tax impact of 2016 transactions. Did you sell real property this year? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2016 taxes. Talk to your tax professional.
Would it be worth making a 13th mortgage payment this year? If your house is underwater, it makes no sense – and you could argue that those dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more.
What else can you do before they ring in the New Year? Talk with a qualified financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation. Here’s to being healthy and wealthy in the New Year!
1 - fool.com/retirement/general/2016/04/11/required-minimum-distributions-common-questions-ab.aspx [4/11/16]
2 - smartasset.com/retirement/is-social-security-income-taxable [3/10/16] 3 - irs.gov/taxtopics/tc506.html [10/20/16]
4 - cbsnews.com/news/tis-the-season-for-giving-back/ [11/14/16] 5 - tinyurl.com/hr964ee [11/11/16]
6 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [10/31/16]
7 - fool.com/retirement/2016/11/09/1-smart-tax-move-to-make-before-the-end-of-2016.aspx [11/9/16]