There’s very little that you can do now to reduce your 2016 tax burden. Outside of a last minute retirement plan contribution, there aren’t many alternatives to change what already happened inside the 2016 tax year.
When looking at your 2016 tax information, however, use the lessons from that tax return to help find strategies that may lower the amount of income taxes that you’ll pay in 2017. The wild card in tax planning for 2017 is the possibility that there may be new tax rules promulgated by the new administration in the White House.
There hasn’t been much information circulated about any possible changes, but a big part of the campaign talked about fewer rates and the possibility of overall lower rates, even at the top end. But that still doesn’t mitigate most people’s desire to legally pay as little as possible.
One place where taxpayers may frequently find reduction possibilities is to look at your savings and investments from a tax perspective. Cash savings, whether in a certificate of deposit or a regular savings account doesn’t offer much in the way of yield today.
Reduce that low yield by between a 20 to 40 percent tax burden, and your net after-tax yield is very likely not even keeping up with inflation. This is not a problem if your savings are designated for near term spending, but if that is the backbone of your overall investment strategy – you better have a lot saved to combat your future reduction in purchasing power with these dollars.
If you’re an investor, and have placed money into risk assets that go up and down in value, make sure that you’ve closely examined your gains and losses by year end. If you have a good investment advisor, this should be a routine part of your relationship.
But frequently I see people where little attention has been given to the possibility of harvesting losses or offsetting gains with losses elsewhere in the portfolio. Selling a losing investment is not a sign that you’ve messed up or you are admitting defeat – it can be a smart tax strategy.
Take a closer look at your asset location. That means examining your holdings to be sure that they’re in the most tax efficient type of account. If you are holding fixed income securities, consider placing them inside a tax deferred account like your 401K or IRA.
For your risk assets that go up and down – consider owning them in a taxable account so you’ll be able to take advantage of any losing positions. For those who plan to invest in real estate in 2017, ask your advisor about cost segregation. Cost segregation is a new concept that allows for faster write-offs for some portion of your real estate investment that yields tax benefits far greater than the typical 27.5 years allowed for real estate.
No one knows what the tax code will become. But suffice it to say that regardless of any rule changes, the best results to lower your 2017 tax bill will come from advanced planning now.
John P. Napolitano CFP, CPA is CEO of U.S. Wealth Management in Braintree, Mass. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.