Few of us like to think about paying taxes, but it’s a good idea to start planning now, so you have time to make decisions now that will save you some money when you file your 2016 returns.
Fortunately, tax planning will be a bit easier this time because Congress late last year passed the PATH Act (that stands for Protecting Americans from Tax Hikes), which made permanent a series of tax breaks that had previously needed annual congressional action to remain in effect. Also, this is the first time in many years that there’s no talk of a lame-duck Congress significantly changing any tax laws, so you can plan with more certainty than in years past.
Whether you’re a business or an individual taxpayer (or both), you should be assembling your financial records for January through October right now and make your best estimates of income and expenses for the last two months of the year. Share this data promptly with your certified public accountant or tax advisor so you can discuss the best tax-saving strategies for your situation.
In most cases, the time-tested strategy of deferring income and accelerating deductions will yield the best outcome, but there can be exceptions. For example, you might know already that a new contract you’ve landed will generate enough income to push you into a higher tax bracket next year.
For businesses, the most significant tax breaks made permanent by the PATH Act were increasing the maximum deduction for Section 179 expenses from $25,000 to $500,000 a year, giving businesses a greater incentive to purchase property and equipment, and the research and development tax credit.
It’s worth discussing the R&D credit with your tax advisor, especially if any of your employees are doing some sort of experimental work. This credit applies to much more than science labs. I have seen electrical contractors, software developers and food and beverage businesses qualify for the R&D credit. In fact, if anything about your business has changed this year — if you have added new products or services, for example, make sure your accountant is aware, as you might qualify for credits or deductions that you might not have been aware of.
In another change this year, the Internal Revenue Service has adjusted its de minimis safe harbor limit for small businesses repairing and improving tangible property from $500 to $2,500. The change permits larger write-offs, but you should check with you tax advisor to make sure you have the proper paperwork in order to claim the deductions.
On personal income tax forms, perhaps the most significant benefit of the PATH Act is making permanent the American Opportunity Tax Credit for qualified college tuition and related expenses. This credit can be significant for families with college students as it permits a write-off of the first $2,000 of qualifying expenses and 25 percent of the next $2,000 in expenses, for a maximum of $2,500.
A smaller but widely used benefit made permanent under the law is the $250 above-the-line deduction allowed for the purchase of classroom expenses for elementary and secondary school teachers and administrators.
As the end of the year approaches, it is also important to review your investment portfolio. Net losses realized from the sale of stocks or mutual funds can be used to offset up to $3,000 of ordinary income; losses above $3,000 can be carried forward and deducted in future years.
Higher income taxpayers should also carefully estimate their adjusted gross income. Certain tax benefits, including itemized deductions, personal exemptions, education credits and student loan interest deductions, begin to phase out when AGI exceeds the cap level.
Take time now to assess your tax situation. It could yield a significant payoff at the filing deadline.
Brian Stratton, CPA, is a director with Horty & Horty P.A., a Delaware accounting firm with offices in Dover and Wilmington.