It’s not to late to reduce 2016 taxes! As you get ready to file your 2016 tax return, take a quick look at the list that follows. It’s a summary of little-known tax strategies that may save you money when you file your tax return. Contact Us to see exactly how a tax strategy applies to your personal situation.
Back out of an IRA conversion. If you converted a traditional IRA into a Roth IRA in 2016, you knew you’d have to report the taxable part of the traditional-IRA withdrawal on your 2016 tax return. But maybe your income ended up higher than expected and you are regretting the conversion. Through a mechanism known as “recharacterization,” you can undo the conversion and turn the Roth IRA back into a traditional IRA. Net result: Without the taxable income from the conversion, you may avoid being taxed in a higher bracket and/or may keep your AGI below the point where you would lose tax breaks.
Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2016? That may help you years down the road, but the contribution isn’t deductible. If you realize you need the deduction that a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution (again, via the “recharacterization” mechanism). The traditional IRA deduction is yours if neither you nor your spouse is covered by an employer-provided retirement plan. If either you or your spouse is covered by an employer-provided retirement plan, then the deduction starts to phase out when AGI exceeds certain limits, depending on filing status.
Make a deductible traditional IRA contribution, even if you don’t work. As a general rule, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner while you manage the home front. For 2016 (and 2017), you can make a deductible traditional IRA contribution of up to $5,500 ($6,500 if you are 50 or over) even if you have no earned income. What’s more, even if your spouse is covered by an employer-provided retirement plan, you can still make a fully deductible IRA contribution as long as your joint AGI as specially computed doesn’t exceed $184,000 for 2016 ($186,000 for 2017). To be deductible for the 2016 year, the IRA contribution must be made no later than your 2016 tax return filing due date.
It may pay for you not to claim a dependency deduction for a child in college. This can work to your family’s benefit if you pay college tuition for your child, your income is too high for you to claim education credits, and your child has enough taxable income to make use of most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return for expenses paid by the child, even though the education expenses were paid out of gifts, loans, or personal savings, including savings from a qualified tuition program. The tax-cutting value of the education credits that the child can claim may be greater than the value to you of the dependency exemption for the child. Note, however, that the child can’t claim a personal exemption for himself or herself if you are eligible to, but don’t, claim a dependency exemption for the child.
Decide between an education credit and the higher education deduction. If you paid college expenses during the tax year, you may be able to choose between taking an education credit or the deduction for higher education expenses. In making this choice, note that the value of the deduction is greater if your marginal tax bracket is higher, while the value of the credit is the same regardless of your bracket. Another factor to bear in mind in making the choice is that different income cut-off points apply to the credits and the deduction.
Home improvements may be medical expense deductions. Home improvements generally aren’t deductible. But a medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer. The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in value of the property. For example, if a qualifying improvement costing $5,000 increases the value of your home by $2,000, the medical expense is $3,000. Note, however, that medical expenses for 2016 (or 2017) can be claimed on Schedule A, Form 1040 only to the extent they exceed 10% of your AGI (but, 7.5% if you or your spouse has reached age 65 at the end of the tax year through 2016).
Contribute required IRA distributions to charity. IRA distribution rules allow for the tax-free treatment of IRA distributions that are donated to charity by an IRA-owner who is age 70 ½, or older. Specifically, a taxpayer may exclude from gross income so much of the aggregate amount of his “qualified charitable distributions” not exceeding $100,000 in a tax year. By excluding the IRA distribution from income, the provision provides a tax benefit to itemizers and non-itemizers, alike. Plus, as a result of year-end legislation, this provision is now permanent.