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Individual Income Tax Update

As we approach the end of the 2016 tax year, here are several recent tax developments to keep in mind as you review your tax-planning strategies.

Expiring Tax Breaks

Last year’s “extender” legislation extended several tax breaks through the end of 2016. There’s no guarantee that they will be renewed again, so be sure to take advantage of them while there’s still time. They include the tuition deduction, the deduction of mortgage insurance premiums as mortgage interest, the exclusion for personal residence cancellation of debt income, and the $500 credit for nonbusiness energy property.

IRS Installment Agreements

If you owe federal income taxes and can’t afford to pay them in full, it’s more important than ever to enter into an installment agreement with the IRS. The Service has been stepping up its collection efforts by hiring additional inside and outside tax collectors. In addition, a law passed last year provides that your passport will be revoked, or that a new passport will not be issued, if you owe $50,000 or more in federal taxes, penalties, and interest and you have not executed an installment agreement.

Required Minimum Distributions

If you reached age 70½ this year, you have until April 1, 2017, to take your first required minimum distributions (RMDs) from IRAs and certain employer-sponsored retirement plans.  Keep in mind, however, that your second RMDs will be due by the end of 2017, so it’s important to evaluate whether you’re better off taking your first RMDs in 2016. That may be case if, for example, double distributions in 2017 would push you into a higher tax bracket or reduce the benefits of certain deductions and exemptions.

If you’re charitably inclined, consider using a qualified charitable distribution (QCD). This strategy, made permanent by last year’s extender legislation, allows taxpayers 70½ or older to transfer up to $100,000 per year tax-free directly from an IRA to a qualified public charity. Plus, you can apply a QCD toward your RMDs for the year.

What’s on the Horizon?

Soon we will have a Republican president and a Republican-controlled Congress, which may have a significant impact on your income tax bill. Among president-elect Trump’s tax proposals are:

  • Slashing the top individual income tax rate by 6.6 percent and reducing the number of tax brackets from seven to three — 12 percent, 25 percent, and 33 percent,
  • Eliminating the 3.8 percent tax on net investment income,
  • Preserving the current preferential rates for long-term capital gains and qualified dividends, and
  • Eliminating the alternative minimum tax.

Whether any of these changes will be implemented is uncertain. But if you believe that your tax rate will go down next year, you might consider deferring some income into 2017.

Please contact us to discuss how these and other recent developments affect your tax-planning strategies.