End of the year tax planning

Todd Pisarczyk
Todd Pisarczyk Sustainable Wealth Management

With the new year right around the corner, now is the time to make sure your 2016 taxes are in order. As you begin preparing your 2016 tax returns, consider the following:

Maximize IRA and retirement plan contributions

This is probably the easiest way to lower your tax bill for 2016. If you contribute to a 401(k) or other qualified retirement plan at work, you must fund the account through payroll deduction. If you’re under 50 years old, the maximum contribution is $18,000 for 2016 and if you’re over 50, it’s $24,000. If you’re self-employed or have an IRA or Roth IRA, you have until April 2017 to make your contributions – for those under 50, the 2016 max is $5,500 and for individuals over 50, the max is $6,500. If you have a SEP IRA, you can save 25 percent of your income to a maximum of $53,000.

Consider a Roth IRA conversion

If you already have a traditional IRA account, you can convert this money into a Roth IRA. The amount converted is subject to federal and state income tax, but it will then grow in your Roth IRA until retirement and distributions will be tax-free.

Take your required minimum distribution from your IRA

If you’re over the age of 70.5, you must take a Required Minimum Distribution (RMD) from your IRAs and/or 401(k) accounts. This must occur by December 31 unless it’s the first year in which you are 70.5 (in that case you have until April 1, 2017). If you fail to take your RMD in time, the IRS can impose a penalty of up to 50 percent of the amount that was to be taken from your accounts. If you don’t need the additional income, consider reinvesting the money from your RMD into a non-qualified investment account.

Tax loss harvesting

If you have capital losses in your non-qualified investment portfolio, consider selling those investments so your losses may be “realized.” These losses can be used as deductions against current or future capital gains. When using this strategy, be aware of the “wash-sale” rule. This disallows the repurchase of the same or substantially the same security 30 days before or after the sale that generated the loss.

Consider a charitable contribution

Charitable contributions are usually tax deductible at an amount of up to 50 percent of your adjusted gross income. To qualify for 2016, gifts must be made by December 31. However, if you would like to make a charitable contribution this year, but haven’t decided on a charity, a donor advised fund allows you to make a charitable contribution and get tax deductions right away.

Qualified Charitable Deductions (QCD)

If you’re over age 70.5 and taking RMDs from a retirement account, don’t forget about the qualified charitable distribution. QCDs allow you to make donations to a qualified charity directly from your IRA and don’t count against the 50 percent deductibility limit. This allows investors who donate large amounts relative to their income to increase their ability to give tax-free. Additionally, QCDs don’t count as income, which reduces adjusted gross income.

Lastly, we did not have space to address all complexities of tax law. It’s critical that you consult a financial advisor at Sustainable Wealth Management or elsewhere before engaging in any of the strategies above.

This Tip of the Week was written by Todd Pisarczyk, founder of the Vancouver-based investment management and financial planning firm Sustainable Wealth Management. Pisarczyk specializes in asset management and financial, retirement income and estate planning.

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