Karyn Vaughn, E.A.
Special to Valley News
Although most people are thinking about how many shopping days they have left until Christmas, accountants are also thinking about how many tax planning days are left before New Year’s.
There are many actions people can take before Dec. 31 that will affect their tax bill for April 15. The basic premise is as follows: If a person pays an expense Dec. 31, they get to deduct it this tax year. If they pay the same expense Jan. 1, they have to wait an entire additional year to realize the tax savings from it.
To combine this thinking about Christmas and tax planning, consider the charitable contribution. If taxpayers itemize their deductions, they’ll get a deduction for all donations to charities. These contributions include cash given to qualified nonprofit organizations as well as goods. Goods range from used clothing or cars given to Salvation Army to food given to the church pantry to toys given to Toys for Tots. Keep receipts on all these items, they will add up to a great deduction.
There is also the opportunity to get an extra deduction in this year for mortgage interest and property taxes. If a homeowner makes their January house payment at the end of December instead of the beginning of January, they can take advantage of the deduction a year early. The same goes for the property tax payments due April 10. Property owners can pay it in December and deduct it for the year 2016 instead of waiting until 2017.
Have any stock investments taken a plunge? If so, do it before year-end and take advantage of the capital loss deduction. How about the 401(k) at work? Does the plan allow for making additional contributions, for example a percentage of a Christmas bonus? The extra contribution is a great way to reduce taxable income for the year and take a bite out of the huge taxes that will come out of that bonus in addition to padding retirement savings.
Self-employed people have the greatest opportunity for year-end tax savings. Any expenses paid or purchases made by Dec. 31 are deductible. In fact, equipment that otherwise would require a five-year recovery under the depreciation statute can be accelerated into the year of purchase under the Section 179 election. In plain English, any business purchase up to $500,000 made before year-end can all be deducted this year. The same goes for rental property owners. Does the rental need a new furnace? Better to buy it Dec. 31 than Jan. 1 and take the deduction.
State taxes are also deductible in the year paid. If tax payers have an estimated tax payment due Jan. 15, they can pay it in December instead and get an additional deduction in this year.
These are general guidelines, and as with all tax planning will depend on the individual situation. This information isn’t just the standard disclaimer; it really is true. The professional tax consultant familiar with a person’s entire tax picture is the best one to advise them. But a little advance planning is always helpful. Merry Christmas and Happy Tax Planning.
Karyn Vaughn is an Enrolled Agent and business consultant. She has been helping taxpayers for 29 years. She has extensive experience in tax matters for individuals, corporations, partnerships, LLCs, trusts, estates and IRS settlements. Her status as an E.A. allows her to practice in all 50 states and to represent taxpayers before the IRS.
Please submit any tax questions for this column by email to karyn@karynvaughn.com or at www.karynvaughn.com.
The post The Tax Lady: Year-end tax planning for the final days of 2016 appeared first on Valley News.