{8:48 minutes to read} There’s something different about entering the month of November, in my opinion. I believe it is due to how close November is to the end of the year. It’s that penultimate month. November allows us to pause and rethink where we have been and where we would like to be before the year ends:
- Some of us will pause to focus on the things we should have done and dwell there (do nothing).
- Others will look back and choose to act and make a change that could be beneficial.
It is the latter group of individuals who may benefit the most from this article.
Before I get into the year-end tax savings strategies, please remember to enroll for 2018 employer-related benefits. Employees Enrollment Session begins this month for pre-tax deduction savings.
Employees, please take advantage of these pre-tax payroll deductions:
- Healthcare
- Flexible spending accounts
- Health savings account (HSA)
- Dependent care (up to $5,000 per household).
Planning still remains one of the most cost-effective ways to reduce your tax bill. It also helps to reduce the surprise and anxiety you may feel when something you didn’t expect pops up.
On November 2, 2017, a new Tax Bill was introduced and we can be sure of at least one thing: future tax rates are going to change. Because this article is geared towards year-end 2017, the guidance in this letter is aimed at 2017 tax planning rather than predicting 2018.
I took the liberty of reviewing tax returns, IRS tax letters and a few frequently asked questions from individuals I have served in the last 5 years. Here are some of the most common areas where I found individuals and families could have planned better or failed to plan at all.
With a little planning, there are multiple ways you can reduce your tax liability. I hope you find at least two of the tax saving tips below applicable to you.
- Compensation: If most of your compensation is commission based, check with your payroll rep to ensure you are withholding the proper amount on the various compensation payouts. Additionally, at this time of year, employees get bonus rewards, stock option compensation, and profit sharing. Though additional compensation can be very attractive, it could also put you in a higher tax bracket.
- Capital Gains: Preserve your investment while managing your tax losses and gains — your tax accountant and your financial advisor should begin having a conversation at this time of year. Don’t forget to keep track of your cost basis from these sales. Often, only the proceeds (sale) amount is reported to the IRS. This is one of the areas that I found to generate the most IRS letters.
- Saving for the later years (retirement savings contribution): Most employees are allowed to contribute up to $18,000 in 401(k), 403(b), etc. If you have not maxed out on these benefits and funds, please do so. Also speak with a financial advisor on other ways to save, some of which could be tax free.
- Accelerate your deductions if you itemize by paying for 2016 expenses such as state income tax, property tax, medical expenses, donations, etc.
- Sharing your home for cash (rental income): If you rent your home or apartment via places like AirBnB, you are required to report this income. The IRS is already aware of it. Knowing what can be deducted is important to reduce the tax impact.
- Alternative Minimum Taxes (AMT): If there’s one promise I hope to be fulfilled under the Trump tax plan, it is the elimination of the AMT. In a nutshell, the tax is basically designed to put a cap on the amount of expenses you are allowed to deduct, which results in a higher income to be taxed. How do you know if you were subject to this tax in 2016? Please see line 45 of your 2016 Form 1040.
- Sale of real estate: Property sales, which may include capital gains taxes, are generally reported to the IRS. Some exclusions may apply if the sale is your primary residence (and you qualify).
- Buyouts of your rental apartment lease contract: These transactions are popping up more and more in the city. With the strong presence of real estate developers in NYC, renters have been paid top dollar to give up their apartments. These deals could run $1M, but wait before you pocket that big check. The IRS and the state want a piece of it, and an actual tax form is issued for the transaction. With proper planning, you can reduce the IRS portion by a great deal.
- Retirement Distribution: This is another area that generates many IRS letters. Most individuals commonly withhold the federal (IRS) taxes but forget the state taxes. This can be an itemized deduction if the taxes are withheld. There is also a 10% early withdrawal penalty.
- Unemployment income: This is taxable income by both the IRS and the state. Most states do not send you a copy in the mail. You may need to retrieve Form 1099G from the state’s website.
- Commuter benefits (commuting to work): These are payroll-related deductions and you can enroll at any time. Commuter deductions are parking and public transit, including train, subway, light rail, bus, and ferry. For parking and transit you can take up to $255 per month for 2017 and $260 in 2018. Here is a great website to learn more about these benefits, in addition to others: Wage Works
- Giving back: ‘Tis the season for giving. We can give without spending a penny. Your trash could be someone’s treasure. Maintain proper documentation.
There are multiple other areas to keep in mind when working on your tax plan:
- Gaming winnings;
- Change in employment;
- Change in marital status;
- Going back to school (higher education expenses);
- New home;
- New job;
- New family; and
- Required minimum distribution, better known as RMD (for individuals who have reached 70-1/2 years).
By no means have I exhausted all the various ways I can help you to reduce your tax liability in this one article. If any of the above apply to you, call to schedule your 2017 tax planning consultation. If there are any significant changes in 2017 as compared to 2016, please call 212-966-9301 .
I look forward to hearing from you.
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com