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Accelerating Deductions

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2016, by year-end. This does not apply to mortgage escrow accounts.
  • Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Tip: Now is the time to bunch deductible medical expenses. Medical expense deductions are 7.5% of AGI this year, but in 2017 increase to 10% of AGI.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2016, depending on your situation. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.

Tip: Accelerating income into 2016 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.

On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

If you have any questions about estimated taxes, please call us.

Caution: The Alternative Minimum Tax (AMT) no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the AMT for 2016.

Due to tax changes in recent years, AMT impacts many more taxpayers than ever before and, the tax is not indexed to inflation. As a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax.

Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.

Note: Thanks to the “AMT Patch” AMT exemption amounts for 2016 remain the same as 2015 (see below), but are set to drop in 2017. For example, the AMT exemption amount in 2017 drops from $74,450 in 2012 to $45,000 for married filing jointly taxpayers. Here are the 2016 exemption amounts:

  • $48,450 for single and head of household filers,
  • $74,450 for married people filing jointly and for qualifying widows or widowers,
  • $37,225 for married people filing separately.