It's Time to Start Planning for the 2017 Tax Season

At the end of every calendar year, you should take these steps to try and save on future taxes.

It's hard to think about planning ahead for 2017 taxes when you haven't even thought yet about filing for 2016. But the best time to prepare for the next year's tax season is actually before the current year-end.

Here are some tax-planning strategies to act on at the end of every year. Taking these steps may reduce your tax obligations down the road.

Manage Tax Brackets by Deferring Income

Being placed in a higher income-tax bracket can cost you tens of thousands of dollars. Deferring or reducing income is a way to avoid paying more money if you're on the bracket threshold. Remember that tax brackets are graduated, so only the income that exceeds the threshold for the higher bracket is taxed at the higher rate.

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You could consider the following two strategies to avoid a higher tax bracket. (Consult with your tax professional to determine the best strategy for your situation.)

Maximize your pretax contribution to a health savings account (HSA). A HSA is used with a high-deductible healthcare plan to save for qualified medical expenses. For 2017, a family may contribute up to $6,750 ($3,400 for individuals), and if you're 55 or older, you can contribute an additional $1,000. Amounts in the account not spent in the event of an account holder's death can transfer to a spouse on a tax-free basis or another named beneficiary as estate income.

Make a donation to charity from your individual retirement account. Individuals age 70½ or older are required to take a minimum distribution from their IRAs. These distributions are considered taxable income. To avoid this, you may instead give up to $100,000 tax-free directly from an IRA to a qualified charity, which you can search for on the IRS website.

Benefit More from Your Charitable Giving

In addition to the above IRA point, there are several benefits to charitable giving when it comes to income taxes. Here are a couple of tips of note before the year-end:

Itemization. Only people who make itemized deductions on income tax returns can deduct charitable contributions, and the deduction is not available to those who claim the standard deduction. If you do choose to itemize deductions, you must have records to substantiate your donations. Notably, all gifts worth $250 or more require a written acknowledgment from the charity describing the gift, date and its value.

Timing. For gifts sent by mail, the envelope must be postmarked by Dec. 31 in order to be deducted on 2016 returns. For gifts of marketable securities, the donor can deduct the full fair market value of the stock and also avoid paying capital gains tax on the appreciation. In contrast to the "postmark rule" above, however, the asset must be delivered to the charity by year-end.

Avoid the Alternative Minimum Tax

The alternative minimum tax (AMT) was enacted to prevent high-income taxpayers from reducing their tax obligations through various legislative loopholes. It is a parallel method of calculating tax liability that expands the amount of taxable income by adding income items that are traditionally tax-free and removing or reducing many deductions allowed under the regular tax system.

The IRS has increased the AMT exemption for 2016, which is the amount taxpayers can deduct from income calculations when determining their potential AMT liability. For individuals, the 2016 exemption begins to phase out at $119,700; for married couples filing jointly, it begins at $159,700.

The best thing to do is to look at your 2015 tax return and determine how close you came to paying the AMT. Then, review your 2016 items that may increase it. Conversely, if you paid the AMT in 2015 but do not need to in 2016, you may be eligible to claim a tax credit for certain items on your 2016 taxes.

Respond to Life Changes

It is good practice to always review your account beneficiaries and trust agreements at the end of the year. For example, the birth of a new grandchild may require an update to your accounts. Other big changes—such as starting or selling a business, buying or selling property beyond your personal home or investments that result in sales, losses or gains—can also influence your tax status.

You should also review your estate plan and documents every several years not only to update family changes, but also to stay current with tax code changes. While there is nothing significant affecting your 2016 filings, tax legislation changes surprisingly often. And with a new president and Congress on the horizon, it doesn't hurt to keep an eye out for new laws or other adjustments, and be ready to make changes to your own filing accordingly.

Beyond that, taking regular stock of your income streams, making the deadlines and anticipating your return in advance of tax season will make it easier when the time to file rolls around each year.

David Terrell is a region manager for The Private Client Group of U.S. Bancorp Investments. He has 20 years of financial planning and wealth management experience, managing a very culturally and economically diverse region.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

David Terrell, Investment Adviser
VP, Region Manager, U.S. Bancorp Investments

David Terrell is a region manager for The Private Client Group of U.S. Bancorp Investments. He manages the financial services activity in Southern California, Arizona and Nevada. He has 20 years of financial planning and wealth management experience, managing a very culturally and economically diverse region.