Grossbach Zaino & Associates, CPA's, PC


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Don’t Wait To Lower Your Taxes

Don’t let the hustle and bustle of the holiday season keep you from exploring ways to minimize your 2016 income-tax liability. Waiting too long can prevent you from using planning moves that can help reduce your tax bite. Consider whether any of the following strategies are appropriate for you.

 

Save More, Pay Less

 

Increasing your pretax contributions to an employer-sponsored retirement plan may help you lower your tax bill. You don’t pay current income taxes on the money you contribute to your plan account, so deferring a greater amount of your pay means less money is withheld for taxes. If you’re age 50 or older and already contributing the maximum annual amount through salary deferral, find out if your plan allows catch-up contributions.

 

Contributing to a traditional individual retirement account is another option. Contributions made by April 18, 2017, may be deductible on your 2016 income-tax return. The contribution limit for 2016 is $5,500 ($6,500 if you’re age 50 or older). Your tax advisor can review the deduction requirements with you.

 

Your Charitable Side

 

You can donate to your favorite charities and increase your itemized deduction for charitable contributions by making 2017 gifts by the end of 2016. Donating with a credit card or with a check mailed by December 31 entitles you to a deduction on your 2016 income-tax return even though you won’t get your credit card bill or have your check processed until 2017. Check the charity’s tax-exempt status before you donate, and keep records of your donations. Deduction limits apply.

 

Look Over Your Losers

 

You may want to consider selling any investment that has lost value since you acquired it, especially if it has consistently underperformed a benchmark and doesn’t show signs of improving. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses that you can’t deduct for 2016 can be carried over for deduction in future years, subject to the same limitations.

 

Time for Profits?

 

Have you been thinking about selling and taking your profits on appreciated stock you’ve held longer than one year? Favorable capital gain tax rates might make this a good time. Currently, long-term gains from the sale of stocks and other securities are taxed at 15% for most taxpayers, 0% for taxpayers in tax brackets below 25%, and 20% for taxpayers in the top regular tax bracket (39.6%). You can use any losses to offset your gains from the sale of appreciated securities.

 

Taxes should never be your only reason for holding or selling an investment. Look at the impact your decision would have on your overall portfolio before you make a move.

 

Bunching Expenses

 

You may be able to exceed the floor amount for medical deductions by scheduling and paying out-of-pocket medical costs before year-end. For 2016, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income (AGI) or 7.5% of AGI for taxpayers age 65 or older.


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Feather Your Own Nest

Getting a big income-tax refund this year? Next year, instead of letting Uncle Sam hold onto your money until you file your tax return, consider having less of your pay withheld for taxes. A smaller refund means you’ll have more money to put toward other priorities.

 

Use the extra cash to:

 

◆ Add to your emergency fund. Consider saving enough to cover a minimum of six months’ worth of living expenses.

 

◆ Increase your contributions to your employer’s retirement plan. Be sure to take advantage of any employer match.

 

◆ Save for a child’s college expenses.

 

Your employer withholds income tax from your paycheck based on the number of allowances you claimed on your IRS Form W-4. The fewer allowances you claim, the more tax is withheld from your pay. You can change your withholding at any time by filling out a new Form W-4. Just make sure you have enough money withheld to avoid owing a large amount of additional tax or an underpayment penalty when you file your return.


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Paying Taxes on Retirement Income

Whether you are retired or soon-to-be, understanding the rules about paying taxes on your retirement income can help you avoid complications at tax time. That’s why it’s important that you work with tax and financial professionals to plan ahead. Here is a brief overview of the tax rules governing retirement income.

 

Social Security benefits

 

About one third of people who receive Social Security have to pay income taxes on a portion of their benefits. The tax-ability of Social Security retirement benefits depends on income — specially defined for this purpose as your adjusted gross income (with certain modifications) plus tax-exempt interest and half of the Social Security benefits you received during the year.

 

If you are a single retiree with income between $25,000 and $34,000 or a married couple (filing jointly) with income between $32,000 and $44,000, you will be taxed on up to 50% of your Social Security benefits. For individuals with income over $34,000 and married couples with income over $44,000, up to 85% of benefits are taxable.

 

Retirement accounts

 

Once you start to make withdrawals from your traditional individual retirement account (IRA), 401(k) or other retirement plan, you’ll have to pay income taxes on previously tax-deferred contributions and on investment earnings.

 

Required minimum distributions

 

The IRS generally requires that you begin taking annual required minimum distributions (RMDs) from your traditional IRAs and retirement plan accounts when you reach age 70½. The first RMD can be delayed until April 1 of the year following the year in which you turn 70½. However, if you choose to do this, remember that you will also have to take a second RMD by December 31 of the year. Failure to take an RMD can trigger an additional 50% tax on the amount you should have withdrawn but didn’t.

 

Annuity payments

 

Annuity payments generally are composed of two parts: the return of the investment, which is nontaxable, and interest, which is taxable. Other amounts, such as withdrawals and dividends, are taxable to the extent they exceed the contract’s cost.


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Double-check Your Return

Everyone makes mistakes, but making a mistake on your income-tax return can cost you. It could delay your refund, boost your tax bill, require an amended return or even trigger an audit. Before you submit your return electronically or put it in the mail, double-check to make sure you haven’t made any errors.

 

Simple slip ups

 

Many tax-return mistakes are simple ones. Ensure that you’ve entered the correct name, address and Social Security number for every person listed on your return. Another frequent error is to enter the right information on the wrong line. So it pays to go through your return line by line.

 

Clear up confusion

 

It’s important that you use the right filing status. If you’re not sure which filing status is right for you, use the interactive tool “What is My Filing Status?” on http://www.irs.gov. You can also check the IRS website to figure out who you can claim as a dependent. Once you determine who qualifies as your dependent(s), verify that you have checked the appropriate exemption boxes for your personal, spousal and dependency exemptions.

 

Correctly calculate credits and deductions

 

If you’re claiming any credits, such as the dependent care credit, you need to follow the instructions carefully. And check that you have completed the necessary forms or schedules. If you’re taking the standard deduction, verify that you are claiming the correct one. You can use the chart in the Form 1040 Instructions or use the interactive tool “How Much is My Standard Deduction?” on http://www.irs.gov.

 

Check your math

 

It’s very easy and common to make simple math errors while preparing your tax return. It’s a good idea to double-check that you’ve added and subtracted all numbers correctly and that you haven’t transposed any numbers. Ensure that you used the right column on the tax table when figuring out your tax.

 

Final details matter

 

Don’t be in such a rush to finish your return that you forget a few final, simple steps. If you’re filing a paper return, verify that you (and your spouse if it’s a joint return) have signed and dated the return. Attach Copy B of each Form W-2 that you received from your employers. Attach each Form 1099-R that shows federal tax withholding. And attach all other necessary schedules and forms in sequence number order. Make a copy of the return and all attachments for your own records. Use the correct mailing address from your tax form instructions, and include a check or money order if you owe tax. And, finally, check that you put sufficient postage on your envelope.


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Finding Your AGI

What’s so valuable about above-the-line income-tax deductions? Because they reduce your total income dollar for dollar to arrive at your adjusted gross income (AGI), above-the-line deductions can help preserve tax breaks — such as personal exemptions for you and your dependents — that might be reduced or phased out completely if your AGI exceeds certain limits.

 

Above-the-line deductions are taken in addition to the standard deduction or itemized deductions. For 2016, the list includes:

 

  • Certain trade or business expenses

 

  • Traditional IRA contributions

 

  • Health savings account and Archer medical savings account contributions

 

  • Self-employed retirement plan contributions

 

  • Self-employed health insurance premiums paid for yourself, your spouse, and your dependents

 

  • Alimony paid

 

  • Student loan interest up to $2,500

 

  • One half of self-employment tax (except for the 0.9% additional Medicare tax)

 

  • Penalty for early withdrawal of savings (e.g., cashing in a CD)

 

  • Expenses of relocating for a job

 

This is only a partial list of deductions, and various restrictions apply. Your tax advisor can give you more information.


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Anything You Need

You got it! Or at least you do if you’ve been conscientious about gathering your income-tax records throughout the year and storing them in one place. But it never hurts to double-check. Before tax time arrives, make sure you have the information you’ll need to prepare your return. Here’s a sampling.

 

Work income. Your income might include your salary, bonuses, commissions, and payments for freelance or part-time work. Having a list of all your income sources allows you to check off each Form W-2 or 1099 as you receive it.

 

Investment income. Collect documents showing interest, dividends, and investment trades.

 

Expenses. You should have all your receipts for property taxes, mortgage and home equity loan interest, childcare expenses, medical bills, tuition, and other potentially deductible or credit-eligible expenses. You’ll also need records of any 2016 estimated tax payments.

 

Charitable contributions. Gather receipts from your donations to tax-exempt charities.


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Back to the Drawing Board

It’s April. Your tax return has been filed. So what’s next? If you’re hoping to pay less tax in the future, your best move may be to go back to the drawing board. Using your 2015 return and what you tell us about your current financial picture as a guide, we can help you identify potential tax-reducing strategies for 2016 and beyond. Here are a few ideas to get you started.

 

Save for Retirement

Making pretax contributions to a 401(k) or 403(b) plan sponsored by your employer reduces the amount of your taxable wages — and the amount of income tax withheld from your paycheck. Your deferrals, along with earnings from investing the deferrals, are not taxable until the money is distributed to you.

 

As a 401(k), 403(b), or 457 plan participant, you may also have an opportunity to make after-tax “Roth” contributions. Making Roth contributions won’t save you taxes upfront. The advantage comes later, after a five-year period passes, beginning with the year you made your first Roth contribution. At that point, any Roth money distributed from the plan is tax free, provided you are at least age 59½ or the distribution is made on account of your disability or death. So, qualifying earnings on your Roth contributions are never taxed.

 

Think Capital Gains and Dividends

Turning to non-retirement account investments, two types of earnings receive favorable tax treatment: long-term capital gains and qualifying dividends. For 2016, the tax rate on both is capped at 20% (15% or 0% for those in a tax bracket below 39.6%). Because your regular tax bracket could be as high as 39.6%, there may be a substantial tax incentive to earn capital gains and dividends instead of fully taxed short-term gains and interest income. Of course, tax considerations are only one factor to consider in managing your investments.

 

Find Above-the-Line Deductions

On the expense side of the equation, certain expenses, often referred to as “above-the-line” expenses, are deductible in arriving at your adjusted gross income rather than as itemized deductions. Some examples include: alimony paid, student loan interest, moving expenses, and self-employed health insurance. Limits apply. An above-the-line deduction not only lowers your taxable income, it can help you qualify for various other tax breaks.

 

A review of your 2016 tax situation may reveal additional opportunities to save taxes. When you’re ready to think taxes, think of us. We’ll be glad to help.