Hope everyone had a nice Thanksgiving! It’s been almost three months since my last post. Until now, there has been a lack of anything interesting to discuss. I’m sure most people would have been distracted by the Presidential election anyway. Regardless of what you thought of the results, we can expect some massive changes to the federal tax scheme in 2017. The President-Elect has already made numerous proposals to overhaul the personal tax regulations. Not all of them will make it through Congress, but any one of them successfully passing and implemented by the Internal Revenue Service as he has proposed them could result in a radically different method by which your taxable income is calculated.
For now, it’s important to take advantage of our current tax code before the champagne is poured at New Year’s. Some last-minute, friendly advice that could reduce your 2016 tax bill as well as help you save for retirement:
Pay your next property tax bill early. There is a possibility that our President-Elect and the Congress will reduce or even eliminate the property tax deduction. The standard deduction could be increased an amount where itemizing deductions (which have always included deducting property taxes) is less beneficial than taking the standard deduction to all but the taxpayers in the most expensive of homes. Property taxes are typically billed on a quarterly basis and paid along with your mortgage interest. Contact your bank and local municipality and you may be able to arrange to make a property tax payment normally due in January or February 2017 in December of 2016. You will get the extra deduction in 2016, reducing your taxable income and tax liability when you file your 2016 return. If the laws regarding property tax change in 2017, you will have already received a tax benefit for the property taxes you would have paid anyway.
Other Itemized Deduction Considerations. The President-Elect has indicated that allowable deductions for mortgage interest and charity will not be changed, but in addition to property taxes, other currently allowable deductions may be curtailed or even eliminated. State income taxes are deductible if you itemize deductions; if you usually owe on your state taxes, consider making an extra estimated payment in December to maximize the deduction for 2016, because you may not be able to deduct the full amount of state taxes owed on your 2017 return. Out-of-pocket medical expenses, un-reimbursed job expenses and tax preparation fees to the extent they exceed certain percentages of your income (10% for the first item and 2% for the latter two combined) are also common itemized deductions that may be eliminated under the new administration, so consider pre-paying these expenses in 2016 to take advantage of this deduction.
Dependent Care Flexible Spending Accounts. For 2016, up to $ 5000 could be contributed on a pre-tax basis (saving you federal and possibly state taxes) to a savings account specifically designated to pay for child care and other babysitting expenses to allow parents to work or look for work. The money needs to be spent on day care expenses incurred through December 31, 2016; you may be able to ask your day care provider to bill you for January during December in order ensure all the funds are used and tax savings maximized. Otherwise the unused funds will be forfeited. The incoming administration has discussed reducing the maximum dependent care contribution to $ 2000 per year, although they may also implement an additional child care tax credit to make up for the lost tax savings. Contributing the full $ 5000 to a flexible spending account and using it before December 31 of this year ensures the maximum tax savings.
Maximize your Individual Retirement Account (IRA) or My Retirement Account (myRA). The incoming administration has not commented on IRAs or the newly-created myRA. Regardless of what happens, I believe this it is important to put in the maximum amount of funds to your IRA or myRA. This allows you to save for retirement by generating income that grows on a tax-deferred basis while possibly also reducing your federal and state tax liability for 2016. Depending on your income level, you may qualify to contribute up to $ 5500 (or $ 6500 if you are over age 50) to a Roth IRA, Traditional IRA or myRA. Roth IRA contributions are made on a post-tax basis and have no effect on your taxable income but as the money is invested and grows, it grows completely tax-free and you will pay no income tax on it when you start making withdrawals in your retirement years (which can start as early as age 59 ½). Traditional IRA contributions are made on a pre-tax basis and reduce your taxable income. The money is invested and grows on a tax-deferred basis; withdrawals made in your retirement years are taxed. The myRA is available to households with less than $ 191,000 in annual income that have no access to any employer-sponsored 401(k) or other retirement plan and the money is invested in US savings bonds by the Department of the Treasury. Like a Roth IRA, contributions are made on an after-tax basis and have no effect on your taxable income but future earnings grow tax-free, allowing you to make withdrawals tax-free in your retirement years.
Max out the 401(k) account, or at least increase contributions in your December paychecks. The maximum 401(k) contribution for 2016 was $ 18,000 and it is expected to remain the same for 2017. Money is contributed to a 401k on a pre-tax basis and reduces your taxable income while it is invested and grows on a tax-deferred basis until withdrawals are made in your retirement years. If you are paid every other week, to reach the maximum amount, you would need to have had $ 692.30 withheld from each paycheck, or $ 750 if you are paid twice a month. Anything less than that and you will miss out on federal (and possibly state) tax savings as well as less savings invested for your retirement. You cannot simply write checks on your own to contribute to a 401k like you can with an IRA but your employer should allow you to increase your pre-tax paycheck contributions at any time, up to the amount of your entire paycheck. Consider increasing your contributions during December to “catch up” for what you didn’t contribute earlier in the year. You can then change the regular contribution back to a smaller, more manageable amount the following January.
529 College Savings Plans. Since contributing to 529 College Savings Plans can only reduce your state tax liability (but not in every state), the incoming administration has not made any comments on what is almost entirely a program administered by the states. 529 Plans allow you to put aside and invest funds for your children’s (or almost any other person you wish to help) future college education while also giving you a state tax deduction or credit. Some states do not give any tax benefit at all for contributing, or only allow a tax benefit on contributions made for your own children. Theoretically, you could contribute up to $ 14,000 per child per year in a 529 plan before potentially incurring federal gift tax liability, but most states set the maximum annual contribution at $ 10,000 per child, or offer no tax benefit for anything contributed over $ 10,000.
I would prefer not to have political discussions or commentary on my blog, but the paths of politics and taxation are always intersecting, and it is my job to report how this will affect you, or what you can do to take advantage of it. I hope you will find this advice helpful and perhaps addresses some concerns you might have in light of the uncertainty ahead. Enjoy the holiday season, and contact me anytime with your questions!