It seems like we just started 2016 – and finished tax year 2015 returns – and here we are, once again, getting ready for the holidays. As we approach the end of the year, we often begin to think of tax planning strategies we can use to help lower our clients’ tax liability.
As the adage says, it’s never over until the fat lady sings. The same concept applies to tax planning this time of the year. Until Dec. 31, there are quite a few tax strategies that can be implemented to reduce your clients’ bottom line tax liability. Here are five year-end tax tips most taxpayers can benefit from for tax year 2016:
#1: Pay January 2017 Mortgage Payment in December
For just about every mortgage loan, mortgage payments are due on the 1st of each month. Often, we are accustomed to making the payment after the 1st, and ordinarily that works well for most budgets. However, at year-end, it’s advisable to make the January mortgage payment in the last week of December so that the lender can credit the January interest paid on the 2016 mortgage interest statement. Sometimes, that extra mortgage interest can mean the difference between having enough itemized deductions to lower a client’s tax liability versus having to claim the standard deduction. Other times, it helps increase the itemized deductions, which effectively reduces the bottom line tax liability.
#2: Donate to Charity
December is the time of the year when most of us become more philanthropic and donate to our favorite charities. Cash and non-cash donations may be tax deductible if a taxpayer has enough itemized deductions to exceed the standard deduction. Generally, taxpayers without other itemized deductions probably won’t donate enough to make a difference on their tax return. However, when there is mortgage interest, property taxes and donations, there may be enough to claim itemized deductions and have an impact on the tax liability.
#3: Closing on a Home Loan
As interest rates get ready to increase and your clients are house shopping, it may be a good strategy to close on a mortgage loan before the end of the year. Loan origination fees from a home purchase are tax deductible as mortgage interest. For example, a 1 percent loan origination fee on a $200,000 loan would provide a tax deduction of $2,000 as mortgage interest in the year the loan was closed. Therefore, if your clients have enough to itemize or are very close to the limit, it may be beneficial to get the loan completed prior to Dec. 31.
#4: Pay Estimated State Taxes
It’s quite easy for clients to forget about making their fourth quarter estimated tax. Most of us hate paying taxes, let alone making a tax payment sooner than necessary. The fourth quarter state estimated tax payments coincide with the federal estimated deadline of Jan. 15. However, if you make the state estimated tax payment in December instead of January, you will receive credit toward state taxes paid in the current year, which is an itemized deduction. For those who are self-employed and expect to owe tax, or anyone who is under-withheld on their paychecks, making an estimated tax payment in December may prove to be beneficial tax planning when you lump the state taxes paid with all the other itemized deductions.
#5: Contribute to Your Retirement Plan
Contributing to your 401(k) to max it out prior to year-end, or contributing to another retirement account such as an IRA or SEP, can create some tax savings. It’s always wise to review retirement accounts in early December so that you have enough time to increase your contributions, particularly if clients have a 401(k) through their employer. Contributions to a ROTH IRA or traditional IRA can be made, and allocated, toward 2016, even after the year ends, so it’s a bit easier to do tax planning with these types of retirement accounts versus an employer-sponsored 401(k). The 2016 limit for contributing to a 401(k) is $18,000.