James Maertin, C.P.A.

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2016 Tax Saving Strategies


 

1.  Contribute to a 401K if your employer provides this option.   The contribution is not included in your taxable income for the IRS and most states.

 

2.  Donate all your belongings (in good condition) that you no longer need to a qualified charity, such as the Salvation Army.  Be sure to get a receipt.   Charitable donations are an itemized tax deduction, which will help to lower your taxable income provided you are not better off claiming the standard deduction.

 

3.  If you and your spouse work and you have children in childcare, you may benefit from contributing to your employer’s FSA (flexible spending account) for dependent care expenses. 

 

4.  Many states (e.g., New York, but not New Jersey) offer tax savings on the state return for contributing to a 529 college savings account from your resident state.  For example, New York has a maximum $10,000 deduction from taxable income. 

 

5.  Your employer may offer you transportation fringe benefits for commuting to work.  You may be able to exclude from gross income up to $250 per month in parking or mass transit expenses.

 

6.  If you need to make an early withdrawal from a retirement account, for reasons such as job loss, try to time the withdrawal to be in a year in which you expect to have lower income.   You could also try to split the withdrawal between two tax years, taking some money out at the end of one year, and the rest at the beginning of the next year.   Early withdrawals are generally subject to a 10% penalty plus income tax on the amount of the withdrawal.  Tax rates are graduated, so the additional income tax will be at your highest tax bracket. 

 

7.  If you buy and sell securities, keep in mind that the tax on short term sales (held less than one year) will be taxed at your highest tax bracket.   If possible, try to hold them for more than a year.   If you have large long term capital gains, selling them in a year that you are in a 10%-15% tax bracket could mean no capital gains tax.  Keep in mind that capital gains is included as taxable income in determining your tax bracket.

 

8.  The tax rate on dividend income is taxed at your highest tax bracket, unless the dividends are considered “qualified”, in which case they are taxed at lower rates (0%, 15% or 20%, based on income).   There are certain requirements for dividends to be considered qualified, but for most U.S. common stocks, you want to hold them for at least  60 days during the 120-day period beginning 60 days before the ex-dividend date. For preferred stock, the holding period is 90 days during the 180-day period beginning 90 days before the stock’s ex-dividend date. 

 

9.  Interest on U.S. government obligations is tax exempt on most state tax returns.

 

10.  Interest on most municipal bonds is tax exempt on the federal tax return.  What's more, for municipal bonds invested in your resident state, you will also get an exemption on the state return.

 

11.  Various credits are available for energy efficiency improvements to your home (subject to a $500 lifetime deduction).

 

12.  When looking to buy a new car, you might consider going electric and claiming a tax credit.

 

13.  There is a 30% federal tax credit for installing solar panels on residential and commercial properties.  

 

14.  If you want to convert your traditional IRA to a ROTH IRA (tax free income at retirement), keep in mind that the income being converted is taxable, so doing it in a year that you expect lower income (such as after a job loss), might be more beneficial. 

 

15.  Timing income and expenses could be beneficial if you anticipate better tax savings in one tax year versus another.