While writing this tax planning letter, we look back to our comments that preceded the 2012 election, finding ourselves with similar concerns while attempting to provide advice. A great deal depends on the outcome of the November election. Not only will 2017 bring a new president, but also a change in control of one or both chambers of Congress is possible. However, no matter which party controls the Senate, neither one is likely to have a filibuster- or veto-proof majority, meaning some compromise will be required to advance significant legislation. If we have a divided government following the election, it unfortunately signals a likely continuation of Washington gridlock.
What does this mean for you? Our advice is to proceed as if comprehensive tax reform will not occur in the near term and that planning should be based on the current rules and rate structure. Accordingly, this year’s letter will focus on recent regulatory guidance, current trends in state taxation, and the complex and expanding compliance requirements for the Affordable Care Act (ACA).
As always, tax planning should be addressed throughout the year and should be an integral part of financial planning. We encourage you to contact your Baker Tilly advisor to discuss how these issues affect your tax position.
Visit the sections below for our coverage of the most pressing year-end tax issues:
- Regulatory guidance
- Tax legislation
- Changes to the R&D credit mean opportunities for start-ups and small businesses
- Estate and gift planning
- International taxation
- State and local taxes
- Deduction of fee paid to terminate merger agreement limited by capital loss rules
- IRS issues guidance on deferred compensation plans
- IRS scam alert
- ACA reporting in 2016: What to expect
- New tax return filing due dates
Year-end tax planning reminders
- Take advantage of the IRC section 179 enhanced expensing deduction. Section 179 limits were permanently increased at the end of last year for the small business expensing limitation and phase-out amounts to $500,000 and $2 million, respectively. The special rules that allow expensing of computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) were permanently extended.
- Maximize your retirement plan contribution. Whether you participate in a company-sponsored plan with a 401(k) or are self-employed and have your own plan, you should take advantage of the maximum contribution each year. Individuals who are 50 or older can also make a “catch-up” contribution, which for most types of plans is $6,000 for 2016.
- Be sure you have basis to fully utilize S corporation losses. A loan directly to the S corporation can allow you to utilize losses. Be sure the loan is properly documented. It is important to keep in mind that subsequent repayment may result in taxable income.
- Take advantage of the 15/20 percent tax rate on qualified dividend income. Qualified dividend income received in 2016 is taxed at the same favorable tax rates that apply to long-term capital gains. In general, the maximum tax rate on qualified dividend income is 15 percent or 20 percent depending upon your tax bracket. Dividend income is “qualified” if it is received from domestic corporations or certain (qualified) foreign corporations. In addition, for the dividend income to be qualified, the stock must have been held by the taxpayer for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (for certain preferred stock, more than 90 days during the 181-day period beginning 90 days before the ex-dividend date). The most common type of dividend that is not eligible for the 15/20 percent rate is dividends from REITs. REIT dividends are taxable as ordinary income at your personal marginal rates.
- Charitable contributions. As a reminder, if you have appreciated publicly traded securities, you should consider using these to make large charitable gifts rather than cash. You still get a charitable deduction equal to the fair value of the stock donated, but you don’t pay tax on the appreciation. If you are making a substantial contribution, you will want to keep in mind the AGI limits applicable to charitable contributions. In addition, don’t forget about AMT. If you expect to be in AMT this year, but not next year, you should consider deferring the gift until January as your tax benefit may increase by up to 11 percent if you expect to be in the maximum tax bracket next year.
We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. See our 2016 Tax Planning Guide for additional ways to help you reduce your taxable income by taking advantage of every tax break to which you are entitled
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.