Options to Help Reduce Your Tax Base
As year-end approaches, I have been fielding many questions from my clients about what options they could take advantage of to shelter some of their income from taxes in 2016. While time is running out with only 6 weeks left in the year, there are several straightforward approaches that could help save you money come tax time in April.
Max out your 401(k) or 403(b) contributions
- This is the most obvious choice as you defer paying income tax on your contributions. This year’s contribution limit is $18,000 and all contributions must be made by the end of the year.
- For those of you older than 50, there is an additional $6,000 catch up provision that you can take advantage of in addition to the $18,000, thus bringing your total contribution amount to $24,000
- If you can’t afford to increase your contributions to the limits, try to ensure that you are contributing enough to receive any company match that your employer may offer.
Contribute to a Traditional IRA
- Regardless of your tax deduction eligibility, a Traditional IRA is still a great vehicle to use as investment gains are deferred until you make withdrawals. The max contribution amount for 2016 is $5,500 up to $6,500 if you are over age 50.
- 2016 contributions can be made up until the tax deadline in April 2017 and still qualify as a 2016 contribution
- For a Traditional IRA contribution to qualify for a tax deduction, it depends upon if you are eligible to participate in an employer-sponsored retirement plan. If you are eligible to participate in an employer retirement plan, then the grid below helps to explain if your contribution could be tax-deductible
|
If Your Filing Status Is... |
And Your Modified AGI Is... |
Then You Can Take... |
|---|---|---|
| single orhead of household |
$61,000 or less |
a full deduction up to the amount of your contribution limit. |
|
more than $61,000 but less than $71,000 |
a partial deduction. |
|
|
$71,000 or more |
no deduction. |
|
| married filing jointly or qualifying widow(er) |
$98,000 or less |
a full deduction up to the amount of your contribution limit. |
|
more than $98,000 but less than $118,000 |
a partial deduction. |
|
|
$118,000 or more |
no deduction. |
|
| married filing separately |
less than $10,000 |
a partial deduction. |
|
$10,000 or more |
no deduction. |
|
| If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status. | ||
Contribute to a 529 Plan
- Although contributions are not deductible on your federal tax return, any investment earnings can grow tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free. Depending upon what state you reside in, a State sponsored 529 plan could offer you a tax credit on your state income taxes.
- For example, in the State of MI, MESP contributions are deductible for Michigan income tax purposes up to $5,000 per year for a single income tax return filer and $10,000 per year for joint filers
- Contributions must be made prior to the end of the year to counts towards 2016.
Business Owners Options
- Business owners have a plethora of options at their disposal for contributing to a retirement plan to reduce taxable income. Such options include a Simplified Employee Pension Plan, or SEP-IRA, Savings Incentive Match Plan for Employees -- SIMPLE IRA, Savings Incentive Match Plan for Employees -- SIMPLE 401(k), or a One-participant or solo 401(k) plan.
- Max contribution amounts for these types of plans generally go up to $53,000 and must be made prior to the end of the year to counts towards 2016.
- Another key to reducing taxable income for business owners is to maximize legitimate business expenses. Expenses such as mileage, cell phone usage, data plans, etc. can all qualify as business expenses if used within your company.
Charitable Contributions
- For people that itemize their deductions for tax purposes, making qualified charitable contributions can be another great way to reduce your taxable income while helping others.
- Contributions can be made via cash, check, credit card, or even a physical donation. You will want to retain any documentation that shows that you did indeed contribute or have a way to value the amount of your contribution if you are donating physical items to a place such as Goodwill or Salvation Army.
- Contributions must be made prior to the end of the year to counts towards 2016.
Any of these options should help facilitate a lower taxable income base for you thus reducing your overall tax liability.I hope that everyone has a great Thanksgiving and can share some time with families and loved ones. For those armed service personnel stationed across the world, we greatly appreciate your service and the sacrifices that you and your families have made for us to have this traditional American celebration.
What I Am Reading This Week
- Don't think of Amazon Echo as just a speaker. It's a whole new way of life (LA Times)
- The 13 most amazing findings in the 2016 exit poll (Washington Post)
- How Not to Overpay on Black Friday (NYT)
- Last Best Chance for Fixing Roads and Refinancing Debt (Bloomberg)
- Your Portfolio Won’t Be Trumped (The Big Picture)