Year-End Tax Planning for Individuals

With changes in the political landscape on the horizon, prospects for tax reform in 2017 and beyond will be clearer after Election Day. Until then, effective legislative action in 2015 brought a number of noteworthy changes that will guide your 2016 year-end tax planning.

Changes in Filing Deadlines
Some returns will be subject to changes in filing deadlines as a result of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“the Highway Act”). While this primarily affects businesses, there are a few changes that are applicable to individuals, including:

1. Foreign Bank Account Reports (FBARs): Deadline moving from June 20 to April 15.
2. Trusts: Trust returns are still due on April 15; however, the extension deadline will change from September 15 to September 30. The two-week extension in September will help those who receive their partnership K-1s on September 15. While it is a short extension, it does give taxpayers a bit more time to include their K-1s and file their returns.

Final Regulations on Money Market Funds
Under section 446, the IRS has issued final regulations that provide a simpler method of accounting for gains and losses on shares of money market funds. These funds typically provide investors with a low-risk investment and offer a stable net asset value (NAV).

While the final regulations are similar to the SEC rules issued in 2014, there are some key differences. The regulations now allow the simplified method of accounting for both floating money market funds and stable money market funds by permitting taxpayers to use the NAV method for determining a gain or loss in the taxable year. Additionally, taxpayers are able to use different accounting methods for the shares they hold in different funds or for shares in a single fund but held in different accounts. However, it is important to note that changing accounting methods to or from the NAV method usually requires consent by the IRS and may require additional forms to be filed.

The final regulations are effective for tax years ending on or after July 8, 2016.

Proof of Educational Expenses Required
If you are planning to claim any educational tax benefits on your 2016 tax return, be sure you have a Form 1098-T in hand. The 1098-T is a tuition statement sent by schools to both the IRS and the student verifying a student’s qualified educational expenses. The IRS was paying out a significant amount of tax credits to ineligible students and thus will be giving close attention to the 1098-T statements to address this issue.

For those looking to claim the American Opportunity Tax Credit, Lifetime Learning Tax Credits or tuition and fees deduction, make sure you have this form first or you will not be able to take advantage of these tax credits.

Double Deduction for Unmarried Homeowners
The IRS recently recognized the Ninth Circuit’s 2015 decision to allow two unmarried co-owners of qualified property to each claim a home mortgage interest deduction. Unmarried taxpayers will now be allowed deduction limitations up to $1.1 million each ($1,000,000 on home acquisition indebtedness and $100,000 of home equity indebtedness).

Fantasy Football – Gambling or Game of Skill?
Nothing has been finalized yet at the federal level, but with the increasing popularity of fantasy football and other fantasy sports, Congress is questioning whether fantasy football should be considered gambling or truly a game of skill. Currently, the Unlawful Internet Gambling Act does not consider these types of online games as gambling but rather games of skill. The IRS, however, views these games as taxable hobby income. If fantasy sports are moved into the gambling category, this change will not affect how the IRS taxes a player’s winnings; it will change a player’s ability to deduct expenses or losses associated with what was once deemed a hobby.

Some states, such as New York and Nevada, have already taken the initiative to categorize them as gambling. We will have to wait and see if others follow suit and be on the lookout for what will happen at the federal level.

Retirement Contributions
You can start to reduce your tax burden by contributing the maximum allowable amount to your retirement plan. By contributing now, you not only reduce your taxable income, but you defer taxes until later in life, and at that point, you will most likely be in a lower tax bracket. Also, if your employer matches a portion or all of your contributions, you certainly want to take advantage of that benefit, as it will help your retirement fund grow at a faster rate.

Timing of Income and Deductions
Assuming that you are not subject to the Alternative Minimum Tax (AMT) this year or next, one strategy you could employ is to defer your income and accelerate your deductions, effectively reducing your taxable income and potentially reducing your taxes. However, if you are subject to AMT, then you will want to consider the opposite of this strategy.

Continue to be Vigilant
The IRS continues to issue warnings about tax identify theft and how to protect your sensitive information. Not only do taxpayers need to be aware of phone scams but phishing email schemes as well. Remember, the IRS will always send a written notice by mail; they will not contact you by phone or email demanding payment. Additionally, the IRS will not ask for credit card, debit card or prepaid card information over the phone. Cases have even been reported of criminals requesting payment via iTunes gift cards.

The IRS website states, “If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov.”

Conclusion
As always, we are here to help develop a strategy best suited for you and your financial goals. Should you have any questions about the topics covered in this article or general questions as you look to develop your year-end tax plan, please feel free to contact me at (805) 963-7811 or eboscacci@bpw.com. As an additional resource, you can access BPW’s Web Tax Guide at http://www.webtaxguide.net/Bartlett/.