Key moves that may help reduce your 2016 tax bill

When it comes to tax planning, procrastination can be costly; the deadline for implementing most investment-related strategies to help reduce your tax bill for this year is December 30, 2016.

We have assembled a number of valuable tips you may be able to implement before the year ends to help reduce the amount you send the IRS.

Capital losses can offset capital gains

  • Include year-end long-term capital gain distributions from mutual funds when estimating your 2016 gains.
  • Determine if you can take advantage of the 0% long-term capital gain tax rate.
  • Sell by year-end to realize losses. If you want to repurchase the position, talk with your Financial Advisor about strategies that will help avoid a wash sale. Pay attention to potential dividend or capital gain distribution reinvestment that could create a wash sale.
  • The last day to double up your position (purchase replacement shares ahead of the sale establishing the loss) and still claim a 2016 tax loss (without triggering a wash sale) is Tuesday, November 29, 2016.
  • Excess capital losses can reduce up to $3,000 of other types of taxable income each year.

Give gifts to help increase deductions

  • Generally, contributions to charities must arrive by calendar year-end.
  • For gift fund contributions, the account must be open and deposit completed before calendar year-end to qualify as a 2016 gift.
  • Be aware of the phase-out rules regarding itemized deductions.
  • Evaluate the tax benefits of gifting long-term appreciated stock versus cash.
  • If you are taking required minimum distributions (RMDs) from an IRA, consider the potential benefits of a qualified charitable distribution (QCD). For taxpayers over age 70½, distributions from a traditional IRA of up to $100,000 are tax free if sent directly to a charity. Discuss your situation with your tax advisor.

Develop a strategy early for managing company stock benefits

  • Exercising incentive stock options (ISOs), nonqualified stock options (NSOs), or restricted stock grants could have significant tax consequences, including alternative minimum tax (AMT) implications.
  • Work with your tax professional before year end to develop a tax-efficient near-term and long-term strategy.

Evaluate the impact of an upcoming change to the medical expense deduction

  • In 2016, anyone age 65 or older may deduct medical expenses that exceed 7.5% of adjusted gross income (AGI). In 2017, that threshold will jump to 10% of AGI resulting in a smaller deduction or none at all.
  • Anticipate medical expenses for 2016 and 2017. Talk with your tax advisor to determine if it would be beneficial to accelerate elective expenses into 2016 or postpone expenses to 2017.
  • Deductible medical expenses can include out-of-pocket costs for dental treatments, eyeglasses, hearing aids, some insurance premiums, etc. For a detailed listing, see IRS Publication 502.

Save on taxes while saving for education

  • Contributions to Education Savings Accounts (ESAs) or 529 plan accounts can grow tax-deferred.
  • 529 plan contributions must be invested with the vendor in time to be reportable on a 2016 account statement to be considered a 2016 contribution.
  • ESA contributions for 2016 can be made up to April 18, 2017.
  • Distributions must occur in the same tax year as the payment of qualified education expenses for both types of accounts to be eligible for tax-free treatment.

Consider the tax benefits of retirement plan strategies

  • In 2016, you can defer $18,000 ($24,000 if you’re age 50 or older) of your compensation by the calendar year-end deadline for many employer-sponsored retirement plan accounts.
  • If available, consider starting or increasing contributions to your employer’s nonqualified deferred compensation (NQDC) plan.
  • Evaluate Roth conversion opportunities.

Take advantage of employer-provided tax-advantaged benefit programs

  • Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) typically require annual re-enrollment.
  • Review 2016 out-of-pocket expenses and adjust 2017 contribution amounts accordingly.
  • Consider funding an FSA for dependent care expenses if you have a child in day care.
Download the Guide

Not sure where to start? Turn to your advisors today.

  • Schedule an appointment with your tax professional to discuss your situation and review your 2016 tax projection.
  • Follow-up with your Financial Advisor to evaluate your portfolio strategies and any investment changes that may help lessen your 2016 tax bill.
  • Go beyond tax planning and create or update your Envision® investment plan profile. With an Envision plan, you can easily make adjustments to account for tax planning considerations or changes in your life (births, deaths, marriages, divorces, etc.). If you’re nearing retirement, your Financial Advisor can also include income projections using the Income Center.

Wells Fargo Advisors is not a tax or legal advisor.

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