Saving Taxes in 2016
- Young adults can take advantage of the enhanced child tax credit, the enhanced American Opportunity Tax Credit, and the enhanced earned income tax credit.
- If you’re over age 50, take advantage of the $6,000 annual “catch up” for your 401(k).
- Many retirees receive tax-preferred treatment of capital gains. If you are over age 70 1/2, you can also donate up to $100,000 to charity tax-free if the funds are drawn from your retirement plan.
Now that the calendar has flipped over to March, it’s time for spring cleaning. It may be too early to plant flowers, but it’s not too early to start doing some tax planning for 2016. Why am I bringing this up now? Because at the end of 2015, Congress and President Obama finally approved over 50 permanent tax extenders that we’ve been waiting for. So how do they affect you?
For young adults
If you’re just starting out in the workforce, there are three enhanced credits that are really important for you:
- The enhanced child tax credit.
- The enhanced American Opportunity Tax Credit
- The enhanced earned income tax credit
What’s more, for those of you who itemize, there’s the extension of state and local general sales tax versus using state income tax.
For midcareer adults
If you’ve been in the workforce for a while and turned age 50 this year, you can start contributing an additional $6,000 to your 401(k) plan every year—on top of the usual $18,000 annual contribution limit. With that $6,000 “catch up” contribution, you can now sock away up to $24,000 toward your retirement each year and reduce your taxable income by the same amount.
If you have just retired, you also have some tax planning considerations. Since you don’t have to take any distributions from your retirement plans or IRAs at this stage of life, you’re probably in a lower income tax bracket. Be aware that there are no capital gains taxes at the federal level if you fall into the 0%, 10% or 15% tax brackets. At this low taxable income level, it makes sense to try to generate long-term and short-term capital gains from your investments now—up to $75,000 a year tax-free if you and your spouse are filing joint returns.
Those over age 70 1/2
Let’s say you are now retired and over age 70 1/2. Thanks to the new rules that have been made permanent, you can now donate up to $100,000 tax-free to qualified charities if you take that money directly from your retirement plan or IRA. We used to have to wait until the very end of the year to see if this tax exemption would be renewed, but again, it’s been made permanent, so you can start donating right now.
Don’t wait until the last minute to get your information to your accountant. Be careful to check for corrected 1099s this year. Also remember you have until April 18 of this year to make Roth and regular IRA contributions for tax year 2015.
I hope this helps you plan for 2016 and beyond.
Until next time, enjoy.
We value your comments and opinions, but due to regulatory restrictions, we cannot accept comments directly onto our blog. We welcome your comments via e-mail and look forward to hearing from you.