Year End Planning

Surprise! Did you write a big check to the IRS last year or get a big refund? Did your deductions not work as the result of the Alternative Minimum Tax (“AMT”)?

Then you need to talk to me about professional year-end planning so you can control your taxes.   With year-end planning, you can delay or reduce your overall taxes by moving income, deductions or other tax items into the right year.  The usual strategies are to delay this years income until next year or take next years deductions this year.

Tax changes planned by our new President include lower tax rates and fewer tax rates, including repeal of .9% Medicare tax and 3.8% surtax on investment income taxes. Consequently typical year end planning, which delays income into 2017 and brings 2017 deductions into 2016, will save even more taxes.

Don’t try the strategies discussed below by yourself. Only a professional tax forecast can predict wildcards affecting your tax bill, such as the Alternative Minimum Tax. With a professional tax forecast we can compare all years. 



RECENT TAX CHANGES add a 39.6% tax rate for joint filers with income exceeding $466,950 and singles with income exceeding $415,050


  • Avoid selling investments held less than 12 months so you can qualify for long-term capital gain rates, 20% or less. But be careful of the 3.8% surcharge.
  • Go for “Qualified dividends” likewise taxed at 20% maximum.
  • A 3.8% surtax applies to net investment income of singles with modified adjusted gross incomes above $200,000 and couples with over $250,000. Investment  income includes interest, dividends, capital gains, annuities, royalties and passive rental income.

TIP: Incur investment expenses to offset investment income.

  • Try to match capital losses and capital gains. If you have carryover losses from previous years or expect capital gains or losses this year, generate offsetting capital gains or losses.
  • You may use capital losses in excess of gains this year against up to $3,000 of other income, and  carry over excess losses.
  • Watch out for the “wash sale rule, under which you cannot take a loss from a sale if you then purchase identical securities within 30 days before or after the sale.

Some strategies may boomerang. Why? Many tax benefits phase out as adjusted gross income rises. Tax brackets change each year. To make year end planning decisions, you must understand the effects of phase outs, tax brackets and changes in the law for both years. The best way to plan is to get a professional tax forecast for this and next year showing what will happen with the plan.

Contribution to your retirement plan.Reduce current income by making the maximum contributions to retirement vehicles, such as 401(k) plans and IRAs.

IRA plan contributions:
A regular IRAs must be set up and contributions made by your tax return filing date. The same true for Roth IRAs. The contribution deduction is $5,500 ($6,500 if over age 50).

For a single filer who participates in an employer’s retirement plan the deduction phases-out between $61,000 and $71,000 of modified AGI for single persons (and heads of households). For taxpayers filing married filing jointly who participates in an employer’s retirement plan the deduction phases-out between between $98,000 and $118,000 of modified AGI.  It gets more complicated if only one joint filer actively participates.Above these ranges, no deduction is allowed.INVESTMENTS

Match gains and losses.
If you have investments that have lost value, sell some losers and winners before year-end and offset the losses against the gains.  As much as $3,000 may be used to offset other income. Unused losses carry over to next year.

Wash-sale trap:  the wash-sale rule denies a deduction for a loss if you purchase identical securities up to 30 days before or after the sale.. However, you’re OK if you sell one mutual fund and buy another with similar investment goals.

Donate appreciated stock the correct way: If you have owned the shares for over a year, you can deduct the full value without paying tax on the appreciation.
Beware of mutual funds.  If the fund pays a dividend this year after you buy it, you owe tax on the distribution this year.
TIP: To avoid this, buy into the fund after the record date for the dividend. Your fund can tell you how much of a dividend you can expect.
0% CAPITAL GAIN(!), dividend tax. If you are in the 10% or 15% regular income tax brackets, consider taking long term capital gains, which will be taxed at 0%. See the Tax Summary.

Pay next years deductions in this year.

Prepay next years expenses this year, such as medical expenses, taxes, charitable or employee expenses. Have state income taxes withheld, so you can deduct them this year on your federal return. For example, if you pay for elective medical or dental procedures this year, it may allow you to deduct medical expenses that exceed the 7½/10%-of-adjusted-gross-income threshold.

State tax.
Pay estimated state tax payments in late December and deduct it this year. Buy a car and add the sales tax to the table amount.
Make your January mortgage payment this year and deduct it this year.

Charitable Contributions

Donations planned for next year can be paid this year, but you must hand over money or mail checks by year end. Give appreciated stock to a favorite charity. You get t deduct the current value of the stock but don’t pay taxes on the gain.
Scour closets, attics and storage areas for clothing, household items, toys, books, and software to give to your favorite charity. You can save several thousand dollars in taxes this way.

Gifts From Senior IRA To Charities: Seniors age 70½ and older give better. Each year they can transfer up to $100,000 from their IRAs directly to charity. It satisfies your required minimum distribution but is not added to your taxable income, so they don’t trigger phase-out’s of your itemized deductions or personal exemptions or trigger a Medicare premium surcharge. One of my clients, John, a retired banker, and his wife each make $10,000 gifts like this monthly during the year. Your broker should have forms for making such gifts.

If your itemized deductions are closed to the standard deduction, prepay some of next years this year and next year when your itemized deducts fall short, take the standard deduction: Joint  — $12,400
Singles — $6,300 and Head of household — $9,100


With year-end planning, a business can increase its operating capital by saving or deferring taxes. The first step is to obtain a professional tax forecast, so you can estimate each year’s tax characteristics, such as net operating losses, tax bracket. the AMT.

Defer income

The most obvious way to remove income from this year is to defer income:

  • Defer billing;
  • Delay a sale of assets.
  • Professionals can delay their year-end billings. Or speed them up if they expect to be in a higher tax bracket next year.
  • Installment sales delay income.

Prepay deductions

Another way to delay taxes is to accelerate next year’s deductions into this year.  For example:

  • Aggressively deduct items;
  • Prepay a reasonable amount of expenses;
  • Buy equipment before year end;
  • Pay bonuses (accrual basis corporations should ask tax advisors before paying related parties) if you’re on the accrual basis,

In bad years, reverse tactics. If this year is a down year, you may want to

  • Shift income into this year, or any year, in which our tax rate is lower.   For example, ship and bill as much, and as early, as possible.
  • Likewise, you may want to elect a longer depreciation period.

TRAPS: The following moves require professional guidance:

  • All tax planning must consider the alternative minimum tax.
  • Heavy last quarter purchases of depreciable assets.
  • Deducting refundable deposits.
  • Prepaying items more than 6 months beyond the taxable year, such as insurance and subscriptions,
  • Accrual method taxpayers attempts to deduct costs of property, services or rental of property before same is provided or used.
  • Accrual basis corporation’s prepayments to related parties.
  • What type of retirement plan to use: Keough plans, Simple IRAs, SEP IRAs, 401(k) s. They have different deadlines for setup and for making contributions. Generally, employer plans and Keogh plans must be established by Dec. 31 to get a deduction for the year.

A Roth pay in is a great gift. You can give $5,500 or what the child earned, whichever is less. But keep in mind that the gift does count toward the $14,000/$28,000 annual gift tax exclusion. The best use of gifts is to remove assets from your taxable estate. This year, you can give up to $14,000, ($28,000 if your spouse agrees), to anyone without owing gift tax.

Consider using §529 plans to help your children or grandchildren with their education costs. Remember, too, that payouts for tuition, fees and books aren’t subject to income tax. Cloverdell education savings accounts are another way to go. Payouts for tuition, fees and books are tax free. Direct tuition payments made on behalf of a relative also pay off taxwise, because they don’t count against the $14,000 gift tax exemptions.
Hire your child or grandchild to work over Xmas.  A Roth can grow into a nice nest egg, especially if you keep making payins each year.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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