2016 Year-End Tax Planning Tips - by Income and Age

How to use the rules to pay less taxes in 2016.

1040 tax form.
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Tax planning strategies can vary with your age and income. That's why the 2016 year-end tax planning tips below are broken into the follow categories:

  1. Lower income; under $75,300 married, $37,650 single
  2. You lost a job or retired earlier in the year
  3. You retired late in the year or may retire next year
  4. Higher income; $200,000 or more
  5. Age 63 and older
  6. Reaching age 70

Find the section(s) that applies to you for customized year-end tax planning tips.

1. Lower Income

If your taxable income (that is income after all deductions and exemptions) is likely to be less than $75,300 married, or $37,650 single, then take advantage of the zero percent qualified dividend and long-term capital gains rate. Here's how. If you own stocks or funds in a non-retirement account you may be able to realize capital gains and pay no tax. For 2016, the tax rate on long-term capital gains remains at zero percent for those in the 10% and 15% tax brackets.

What to do? You will need to do a tax projection to estimate your taxable income and capital gains both before and after any anticipated changes. If there is room for additional capital gains that will incur no tax, don’t hesitate. Realize the gains.

Caution 1: You can only use this feature to realize gains in an amount that “fills up” the 15% bracket. For example, as a married filer, if you have $50,000 of taxable income, that leaves you with room for about $25,300 of long-term capital gain that may be eligible for the zero percent rate.

Caution 2: If you have capital losses from previous years, your current year capital gain will use up those losses first which means you won't really be utilizing the zero percent capital gains tax rate. In this situation, it may not be advantageous to realize gains. You may want to save those losses for use against future capital gains that may be taxed at a higher rate.

Best for: Intentionally realize gains if you will be in or under the 15% bracket and have no capital loss carryforward. Intentionally realizing the gain can involve an exchange, such as exchanging one S&P 500 stock index fund for another similar S&P 500 stock index fund.

2. Lost a Job or Retired Early in the Year

If you lost a job or retired early in the year you may have very little taxable income for the year, particularly if you itemize deductions. In these years consider Roth conversions.

What to do? Low-income years can result in a tax situation where you have more deductions than income. In those years you may be able to convert a portion of a traditional IRA to a Roth and pay no tax. You would convert a sufficient amount to match the amount of deductions you have, leaving your taxable income at zero. Or if you expect to be in a higher tax bracket later in retirement, you may want to convert enough to fill up the 10% or 15% tax brackets. You will only uncover this opportunity by doing year-end tax planning before December 31st.

Best for: Those folks who's taxable income now will be taxed at a lower rate than what they will experience later in retirement. 

3. You Retired Late in the Year, or May Retire Early Next Year

If you retired late in the year or plan on retiring early next year, you may see a substantial change in your tax situation.

What to do? If your employment status change means your tax bracket will be lower next year, you may want to see if you can defer income or bonuses from this tax year into a future year where your tax bracket will be lower.

Best for: Those who expect to have a lower income next year than in this current year.

4. Higher Income Earners

Those with expected income greater than $250,000 for marrieds, $200,000 for singles - watch out for the surtax. The Medicare surtax affects high-income earners. It is a 3.8% tax that applies to unearned income in excess of certain thresholds. In addition, high-income earners may be subject to the phaseout of itemized deductions and personal exemptions.

What to do? You can re-position non-retirement savings and investments to reduce taxable income that might cause you to be subject to the Medicare surtax. For example, municipal bond income will not be subject to the surtax.

In addition, max out all deductible savings plan - for example if you started a job mid-year you can withhold nearly all of your paycheck to a company retirement plan the last few checks of the year to get the maximum amount in for the year - and make sure you contribute to HSAs - or any other deductible plans you are eligible for.

Best for: High-income tax payers with lots of investment income that is not sheltered in tax-deferred accounts.

5. Age 63 or Older

Each year your Medicare Part B premiums are determined by looking at your tax return two years prior. If you have a year with high income, even if it was due to a one-time event such as the sale of a piece of property, it may cause your Medicare Part B premiums to be higher two years later.

What to do? See if there is a way to spread gains and income over more than one tax year to avoid crossing the Medicare Part B threshold in any one year. If it was a one-time even that put you over the threshold, file an appeal with Social Security and explain that your income is not currently as high as it was that year.

Best for: People 63 or older who anticipate realizing capital gains or perhaps an installment sale (from the sale of a business for example) who could spread the realization of income out over more than one tax year to stay under the Medicare Part B threshold.

6. Turning Age 70

At age 70 ½ you must begin taking required minimum distributions from retirement accounts. This extra taxable income can also make more of your Social Security benefits subject to taxation. This causes many people who start required minimum distributions get caught off guard by a larger than expected tax bill.

What to do? Make sure you withhold the right amount of tax from your IRA distribution. Year-end tax planning will help you accurately estimate your new tax bill so you have the appropriate amount of tax withheld.

Best for: Anyone who is starting their required minimum distributions for the first time.