December 2, 2016

2016 Year-End-Tax Planning Advice

As we approach the end of the year, we are offering several tax-planning tips for your consideration. The recent election and potential tax reform on the agenda for next year may necessitate a closer inspection of your income and deductions. Please review the following tips for holistic year-end planning to minimize taxes for 2016 and maximize tax savings in years ahead.

Qualified Small Business Stock (QSBS)

Gain on the sale of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100% depending on your date of purchase.

In 2015, the 100% capital gain exclusion was renewed and permanently extended relating to gain realized on certain dispositions of QSBS acquired after September 28, 2010. If you acquired QSBS stock after this date, your federal tax rate for capital gain on QSBS could be “0%”.

If you acquired QSBS before September 27, 2010, you will still be able to receive partial exclusion contingent upon the date of acquisition. For QSBS acquired before February 18, 2009, the exclusion is limited to 50%. For QSBS acquired between February 18, 2009 and September 27, 2010, the exclusion amount is limited to 75%.

We would be happy to assist you in reviewing your stock holdings to determine if any is eligible for QSBS treatment.

3.8 % Net Investment Income (NII) Tax

If you have modified adjusted gross income above $250,000 for married filing joint, $125,000 for married filing separate, and $200,000 for all other filing statuses, you may want to consider strategies to minimize exposure to this additional 3.8% federal tax. You may want to consider shifting income to future years or recognizing additional losses. Income subject to NII includes interest, dividends, rents, passive income, capital gains, annuities, and royalties. We can assist you in the review of your income and deductions in order to minimize your exposure to the NII tax. As frequently discussed in the press, this tax is likely to be repealed by the new administration. Assuming this tax will be repealed, to the extent it makes good investment sense, a deferral of gains and other investment income into 2017 could save this tax in the future.

Loss Harvesting

Consider harvesting unrealized capital losses to offset any net realized capital gains. If you own securities that have become worthless or made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction. We are also happy to assist in reviewing possible losses to determine if they are eligible for Section 1244 treatment.

Required Minimum Distribution (RMD)

Individuals older than 70 ½ generally must take the RMD before the end of the year.

Those individuals who turn 70 ½ in 2016 have until April 1st, 2017 to withdraw their first Required Minimum Distribution (RMD). For these individuals, we recommend an analysis to determine the best year to take the distribution. Taking the distribution in the current calendar year could allow you to remain in a lower tax bracket next year by avoiding having to take and recognize as income two distributions in 2017. Taking the distribution in 2017 might offer benefits in terms of lower tax rates as proposed by the new administration.

Please note that currently there are no Required Minimum Distributions for Roth IRA accounts.

IRA Charitable Contributions

The direct IRA-to-charity provision was renewed and made permanent in 2015. If you would like to make charitable contributions using IRA funds, here are some tips to ensure your donation will qualify for this treatment:

  • The IRA owner must be age 70 ½ or older
  • The donor must directly transfer the money tax-free to an eligible charitable organization
  • The maximum contribution is limited to $100,000
  • SIMPLE IRAs and SEP Plans are not eligible

Any distributions made to charity may qualify as part or all of the taxpayer’s required minimum distribution for the year. This option can provide tax savings opportunities for those taxpayers who are subject to charitable limitations or deduction phase-outs.

Roth Conversion

You may want to consider converting your traditional IRA to a ROTH IRA before year end if you expect to be in a lower tax bracket this year or if the value of your traditional IRA assets is low. If you are interested in converting, we can help you to determine the tax consequences and optimize the conversion amount. The primary benefit of a ROTH IRA is that the assets grow tax-free and there is no requirement to take minimum distributions.

Pre-pay State Income Tax

In specific scenarios, accelerating your estimated state income tax payments can be highly advantageous. By pre-paying in December 2016 as opposed to January 2017, you will be allowed a federal deduction that may offset your current year income. Although this strategy may not be beneficial if you are subject to the alternative minimum tax in 2016, you may receive a benefit related to the net investment income tax. The potential tax reform is likely going to reduce the benefit of the state tax deduction in the future; thus, even if you are subject to AMT for 2016, it is likely that accelerating your fourth quarter tax payment from January 15th to December 31st will maximize the benefit of your state tax deduction. We consider the benefits of pre-paying state taxes with all clients and can advise the best course of action.

Charitable Contributions

Charitable contributions provide current tax savings, generally offsetting your highest taxed income first. Charitable gifts can be made in cash, stock, or other assets. You may want to consider different charitable recipients such as donor advised funds, community foundations, or public charities. Long term, highly appreciated assets provide the most tax savings due to the double benefit of the tax deduction and avoidance of capital gains on the appreciation. Due to potential tax reform and possible future limitations in deductions, you may want to consider increasing your charitable giving this year to secure your tax benefits.

If you administer a private foundation, please ensure that you satisfy the grant requirements prior to year end. In general, about 5% of the value of the assets must be granted to qualified organizations every year.
We can assist in advising you on optimizing the amount of charitable giving this year as the tax rules related to charitable giving can be complex.

Stock Options

If you own options on high-dividend-paying stock, options with a fast approaching expiration date, or options with an exercise price well below today’s market value, it may be time to consider exercising. When to exercise options is often a matter of personal preference based on your own beliefs in the future potential in the stock. However, there are major tax considerations such as lower tax rates next year as proposed by the incoming administration. We recommend consulting with us before year end to review your long-term financial goals and current tax position to determine the best strategy regarding your stock options.

Solar Tax Credit

The Solar Tax Credit has been extended through 2021 with a gradual ramp down starting in 2019. The current credit rate for 2016 is 30% of acquisition and installation costs. Congress has also changed the eligibility requirements to the commencement of solar construction as opposed to full solar completion or in-service date.


Businesses can take advantage of depreciation deductions that greatly reduce taxable income. Below are two methods available for 2016.

  • Section 179 allows businesses to deduct the “full price” of qualifying equipment and/or software purchased in 2016 up to $500,000. Equipment/Software must be purchased and placed in service before December 31, 2016 and all equipment purchases, finance, and/or leases must not exceed $2,000,000. If you intend to purchase more than $2,000,000 of fixed assets, you may want to defer the purchase of some assets until 2017 when these purchases might be fully deductible as opposed to having to depreciate the asset over a number of years.
  • Bonus Depreciation is offered in 2016 at 50% of the cost of new capital equipment. Unlike Section 179, there is no spending cap and in the event that costs generate a loss, losses can be carried forward.


For 2016, the gift tax exclusion will remain at $14,000 while the lifetime exemption has increased to $5,450,000. For 2017, the lifetime exemption is expected to increase of $5,490,000.

Contributions made to 529 plans can be “front-loaded” by making a lump-sum payment equivalent to five years’ worth of exclusion ($70,000 for individuals and $140,000 for married couples).

While not yet finalized, the proposed regulations under Section 2704 would severely limit the use of valuation discounts for any type of transfer of interest in certain family limited partnerships or other family business transfers for which the family retains control before and after the gift or bequest occurs. If you are in the process of an estate planning transaction that utilizes valuation discounts, or if you are contemplating such a transaction, we suggest completing the gift as soon as possible to take advantage of these discounts.

Estate tax is another area the new administration is likely to address. Based on a potential repeal of the estate tax, we would not advise making taxable gifts in 2016. Annual exclusion gifts and gifts that are below your lifetime exemption should be evaluated with the potential changes in mind prior to executing. We would be happy to assist with more comprehensive estate and tax planning to effectively utilize your lifetime exemption.

Planning for the Future

If you have any questions or concerns about the information presented above, please do not hesitate to contact us for more specific advice regarding your individual tax planning needs.