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My 12-Step Program for Year-End Tax Planning


Have you pushed aside tax planning in 2016? Until Trump changes our tax code, these suggestions can help you save time and money!

Do you habitually postpone your tax planning? If so, you need to enter our 12-Step Program for Tax Planning Procrastinators. You have two weeks for a mini-tax makeover — plenty of time to save money, especially when you’re calculating the cost of Christmas presents piling up under the tree!

1. Top off tax-deferred contributions

These include your 401k, flex-spending accounts, your HSA (Health Savings Account), and IRA. You have until 4/19/16 for all but the 401k, but the sooner you contribute, the sooner you’ll put your money to work.

2. Convert to a Roth IRA

You have until 12/31 to move money from a pre-tax retirement account to a Roth. Roth IRAs are a fabulous way to build wealth and you have until 10/15 of the following year to ‘re-characterize’ (or “undo”) your conversion. This is one of the most overlooked tax-planning moves I run across in my practice.

3. Check your payment status

If you haven’t made all of your estimated payments, you can catch up, penalty-free, through withholdings in December. Employees can do this on a paycheck. If you’re retired and taking distributions from your 401k/IRA, you can take a distribution of the amount you’re behind and have it all go to taxes. You can use this technique with a Roth IRA to avoid taxable income.

4. Clean out your closets

If your closets are full of clothing you no longer wear, donate it to your local charity before 12/31 for a great tax write-off. As always, we recommend you purchase a copy of Deduct It! Deduct It! to organize your records and get the best deduction value allowed by the IRS. (Of course, if you’re a client, just call us for a free copy.)

5. Review your charity receipts

If you have donated $250+ at one time to a charity, you are required to get a “contemporaneous” receipt. In other words, you can’t go back to the charity if you’re later audited and get a receipt, even if the donation is valid, so get one now.

6. Check your itemized deductions

You may have heard of deduction bunching. Take advantage of this when you don’t spend enough to itemize every year, but you're close. By bunching, you itemize every other year. In other words, you may want to pay your state estimated taxes in December rather than January if you can itemize this year (and you're not paying AMT). Same for real estate taxes — bunch them at the beginning and the end of the year. Consider making your January church contributions in December and so on. By the way, deductions paid by credit card in December, but not paid until January qualify for a December deduction. That is because the IRS treats credit card charges as cash.

7. Search for a new CPA

If you’re planning on making a change or this is the year you finally need more than Turbo Tax, you’ll get more attention when interviewing candidates if you don’t wait until January. Use this guide to help you find a great CPA.

8. Calculate your health care credit status

Wondering if you are going to have to pay back some of your credit? This nifty IRS calculator will figure the impact of mid-year life changes on your credit.

9. Review your mileage

The business mileage rate for 2016 is 54 cents per mile — it adds up quickly if you use your vehicle for work. If you’ve been too busy to calculate those medical, business, or charity miles, get out your calendar and fill in the holes – mileage deductions can make a big difference. While you’re at it, go ahead and download one of the clever new apps for automatically recording and calculating your mileage. MileIQ and TaxMileage are just a couple that are free and easy.

10. Make your annual gifts

If you’ve set up an annual gifting program to pass along $14k to your heirs each year, you must write and distribute the checks by 12/31 for them to count for the current year. And remember, the $14k annual limit includes all gifts during the year. If you’ve made Christmas and birthday gifts, you might want to limit the final check to $13k or whatever is applicable.

11. Check long-term capital gains and losses

Have you realized a gain on any investments during the year? If so, review your portfolio to see if you have some duds that need to go. You can buy them back 31 days later if you really can’t bear to live without that particular loser.

12. Make sure you’ve taken your Required Minimum Distribution (RMD)

Don’t depend upon your brokerage or financial advisor to calculate and send your annual RMDs. Most do, but it’s up to you, not the brokerage, to follow the rules. Penalties for missing your distribution are the most onerous in the tax code: 50% of the amount missed per year. So if you miss a $10,000 RMD for two years running, your penalty is already $10,000! Plus, of course, the taxes you already owe on a pre-tax distribution.

The good news is you can complete my 12-Step Program in an afternoon. You may need to repeat the program every December, but it may help to know that there are others like you out there. Help is only a mouse-click away for you and other postpone-aholics everywhere.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice