2016 Year-End Financial Planning

Practice Areas

By: Narender Singh

Ordinary income tax rates. One of the most significant changes over three years ago that still reverberates with many taxpayers is the creation of the 39.6 percent bracket, up from a top 35 percent rate.

Net Investment Income (NII) tax. The NII tax is 3.8% on the lesser of net investment income or the excess of modified adjusted income over the threshold amount. The threshold amount is equal to $250,000 modified adjusted gross income (MAGI) in the case of joint returns or a surviving spouse; $125,00 in the case of a married taxpayer filing a separate return, and $200,000 for other filers.


Filing Status



Married filing jointly and surviving spouse



Heads of households



Unmarried individuals



Married filing separately




If possible, keep general income below the threshold amounts by spreading income out over a number of years or offsetting the income with above-the-line deductions. Grouping similar categories of net investment income activity may be another way to reduce overall NII.

Additional Medicare Tax. The Additional Medicare Tax is 0.9 percent of covered wages and other compensation above threshold dollar amounts that mirror the threshold amounts of the NII tax regime.

Capital Gains and Dividends. The tax rates on qualified capital gains (net long-term gains) and dividends range from 0 to 20 percent, depending upon the individual’s income tax bracket.

Income Tax Bracket

Capital Gains Rate

39.6 percent

20 percent

25 to 35 percent

15 percent

10 to 15 percent

0 percent


Spikes in income, whether capital gains or other income, may push gains into either the 39.6 percent bracket for short-term gain or the 20 percent capital gains bracket. Spreading the recognition of certain income between 2016 and 2017 may help minimize the total tax paid for the 2016 and 2017 tax years.

Capital losses. Cashing out stocks with a built-in loss may be a simple means of providing a loss to be taken against current ordinary income. Individuals can deduct up to $3,000 of additional losses, whether net long-term or short-term; losses above $3,000 can be carried over and deducted in succeeding years. If the investment remains economically attractive, taxpayers can buy the same stock more than 30 days before or after they sell shares in the same company. This avoids the wash sale rules, which would disallow the loss.

Adjusted gross income caps. Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • Itemized deductions
  • Personal exemptions
  • Education savings bond interest exclusion
  • Maximum child’s income on parent’s return: (Form 8814)
  • Education credits
  • Student loan interest deduction adoption credits
  • Maximum Roth IRA contributions maximum IRA contributions for individuals.

American Opportunity Tax Credit. The PATH Act made the American Opportunity Tax Credit (AOTC) permanent. The AOTC is equal to 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of qualified tuition and related expenses.

State and local sales tax deduction. The PATH Act made permanent the itemized deduction for state and local general sales taxes. That deduction may be taken in lieu of state and local income taxes when itemizing educations.


Generally IRS tables based upon federal income levels and a taxpayer’s number of dependents are used for this optional deduction. Taxpayers who wish to claim more than the table amounts must provide adequate substantiation.

Exclusion for direct charitable donation of IRA funds. The PATH Act made permanent the exclusion from gross income of qualified charitable distributions for individuals aged 70½ or older. The exclusion covers distributions of up to $100,000 received from traditional or Roth IRAs ($100,000 for each spouse on a joint return).


The transfer to the charity from the IRA must be completed by December 31, 2016, to treat it taking place in 2016; mere instructions to the IRA trustee are insufficient.

More permanent extenders include:

  • 100-percent gain exclusion on qualified small business stock.
  • Conservation contributions benefits.
  • Five-year solar energy property.

Extenders Expiring at End of 2016

The PATH Act renewed several extenders related to individuals retroactively for only two years through 2016, so they are up for renewal again at the end of 2016.

Tuition and fees deduction. The PATH Act extended the above-the-line deduction for qualified tuition and related expenses for two years, for expenses paid before January 1, 2017. The maximum amount of the tuition and fees deduction is $4,000 for an individual whose AGI for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose AGI does not exceed $80,000 ($160,000 in the case of a joint return).


Payments by year-end 2016 may be particularly critical to taking this deduction.

Exclusion for discharge of indebtedness on principal residence. The PATH Act extended the exclusion from gross income of discharged qualified principal residence indebtedness, applicable to discharges of qualified principal residence indebtedness occurring before January 1, 2017, or discharges that are subject to an arrangement that is entered into and evidenced in writing before January 1, 2017.


To exclude discharged debt under this exclusion, the lender needs to issue the appropriate Form 1099-C, for the particular tax year desired (in this case, 2016). The IRS says that it “encourages” the homeowner to work out the disagreement with the lender and have the lender issue a corrected Form 1099-C.

Mortgage insurance premium deduction. The PATH Act extended the treatment of qualified mortgage insurance premiums as qualified residence interest retroactively for two years, to apply to amounts paid or accrued through 2016, and not properly allocable to a period after December 31, 2016.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable non-business energy property credit allowed to individuals, making it available for qualified energy improvements and property placed in service before January 1, 2017.

More incentives extended through 2016 include:

  • Fuel cell motor vehicle
  • Electric motorcycles credit

Other 2016 Deadlines/Changes

IRS guidance, regulations, and case law released so far in 2016 also impact on year-end tax planning. Two of the more notable 2016 developments for use by individuals include:

Per taxpayer mortgage deduction. The IRS announced its acquiescence in Voss, 2015-2 ustc ¶50,427, where the Ninth Circuit Court of Appeals, found that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit provisions under Code Sec. 163(h)(3) apply per taxpayer and not per residence.


Rather than sharing the $1.1 million mortgage debt limit to which each taxpayer is subject, whether single or married (half for married, filing separately), two unmarried taxpayers sharing the same residence and same mortgage debt are effectively allowed —as the law now stands— a combined $2.2 million limit.


Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning.

Marriage. Marital status (single, married or divorced) for the entire tax year is determined on December 31st. Because the income tax brackets vary depending upon filing status, a marriage penalty or a marriage benefit may result for any particular couple.


As a general rule, if each partner has income approximately in the same amount of the other, they will pay more filing a married, joint return rather than as two single individuals. Accelerating or postponing marriage or divorce at year-end might be considered based upon this difference in tax brackets.

Same-sex marriage. The Supreme Court held in June 2015 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex. Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state. The IRS followed up in 2016 with final regulations (TD 9785).

Dependents. A child born at any time during the tax year is consider a child for that entire tax year. Subject to AGI limits, a child born at year-end 2016 entitles the parent to a full $4,050 personal exemption, a full $1,000 child credit, and up to a $3,000 child care credit if eligible.

Retirement. Taxpayers may want to take a look at a number of different provisions at year-end in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines keyed to the tax year. Three strategies especially stand out for year-end consideration:

  • Minimum distribution requirements. Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70½. While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year.
  • Roth conversions/reconversions. A traditional IRA may be converted to a Roth IRA. As with rollovers to traditional IRAs, the 10-percent additional tax on early distributions does not apply; however, unlike rollovers to traditional IRAs the amount converted is taxable in the year of conversion.


Any amount converted to a Roth IRA is included in gross income as a distribution for the tax year in which the amount is distributed or transferred from the traditional IRA. When a rollover spans two tax years, the taxable amounts from the traditional IRA are included in gross income in the year in which the amounts are withdrawn from the traditional IRA.


Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Individual Shared Responsibility Payments. For 2016, the individual shared responsibility payment is the greater of 2.5 percent of household income that is above the tax return filing threshold for the individual’s filing status or the individual’s flat dollar amount, which is $695 per adult and $347.50 per child, limited to a family maximum of $2,085, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2016.


Open enrollment for coverage through the Health Insurance Marketplace for 2016 has closed. However, some qualifying life events may make an individual eligible for non-filing season special enrollment.

Medical expense deduction. Taxpayers who itemized deductions (for regular tax purposes) may claim a deduction for qualified unreimbursed medical expenses to the extent those expenses exceed 10 percent of adjusted gross income (AGI), unless the taxpayer falls within an age-based exception.

Taxpayers (or their spouses) who are age 65 or older before the close of the tax year, may apply the old 7.5 percent threshold for tax years but only through 2016.


Taxpayers who are age 65 or older may consider accelerating medical costs into 2016 if they want to itemize deductions since the AGI floor for deductible expenses rises from 7.5 percent to 10 percent in 2017. For deductions by cash-basis taxpayers in general, including for purposes of the medical expense deduction, a deduction is permitted only in the year in which payment for services rendered is actually made.

FSAs. Contributions to health flexible spending arrangements (health FSAs) are capped under the ACA at $2,500 (indexed for inflation to $2,550 in 2016 and $2,600 in 2017).


Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income Acceleration/Deferral

Taxpayers using the cash method basis of accounting (generally most individuals) can defer or accelerate income using a variety of strategies. These may include:

Sell appreciated assets. If a taxpayer has current losses that may cover these gains that are “locked into” certain assets until they are sold, realizing gains may make sense. For example, identical appreciated securities may be sold and repurchased. Their cost basis would be reset with, at worst, a downside of some accelerated tax liability. The “wash sale” rule only applies to losses.

Bonuses. If an accrual-basis employer delays paying a properly-accrued bonus in the year of service (for example, 2016) until up to 2½ months into 2017, the employer can get its deduction in 2016 while the employee (if “unrelated” for tax purposes) will be taxed in 2017.

Installment contracts. Income on a sale reported under the installment method is realized pro-rata over the years in which the installment payments are made. To accelerate income realization, the taxpayer simply sells the remainder of the installment contract to a third party for a lump sum.

United States Savings Bonds. For cash-basis taxpayers, interest on series E, EE and I bonds is generally taxed at the earliest of disposition, redemption or final maturity of the bond (however, the taxpayer can elect to report the interest as it accrues).

Debt forgiveness income. Determination of the time of debt forgiveness requires a practical assessment of the facts and circumstances relating to the likelihood of payment. Convincing the lender to issue a Form 1099-C, Cancellation of Debt, for the 2016 tax year, should also form part of the process.

Like-kind exchanges. Taxpayers may also avoid tax deferred, like-kind exchanges by taking steps to disqualify the transaction from Code Sec 1031 treatment. Such steps might include delaying identification of replacement property, transferring cash to an intermediary, or switching to a sale-and-reinvestment arrangement.

Deduction Acceleration/Deferral

A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions.

Year-end payments. It is not necessary to pay cash to make a payment with the goal of attaining a deduction or other tax benefit for 2016. Taxpayers can write a check or can charge an item by credit card and treat these actions as payments.


It does not matter, for example, when the recipient receives a check mailed by the pay or, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course.” The same treatment applies for a gift — sending a check is treated as a payment and will qualify for the current year gift tax exclusion.

Package payments. An agreement for services or other deliverables that require full upfront payment may gain a full, immediate deduction, depending upon the circumstances (for example, payment up front for an orthodontia program as a medical expense deduction).

Tuition. Payments made in 2016 for tuition for an academic period beginning in 2016 or during the first three months of 2017 qualify for an education credit taken in 2016.

Estimated state taxes. Although the deadline under state law is generally not until January 15, 2017, payment of fourth quarter state and local estimated taxes before year-end 2016 is deductible for 2016 for federal tax purposes.