The end of the year is an exciting time for most of us. Crisper weather, holiday celebrations, family time ... And year-end tax planning. What's not to love?
While I'm probably one of the few who enjoys tax planning, it doesn't have to be as painful as you might think. Here are three tips to help you reduce your 2016 tax liability.
1. Defer income and accelerate deductions.
As an individual, you can reduce federal taxes by paying state income tax in December (assuming you're not subject to alternative minimum tax). You can also delay a year-end bonus until January to avoid paying the tax in 2016.
Similarly, if you own a cash basis business, you can pre-pay certain expenses in December to reduce your taxable income in the current year.
2. Make charitable donations.
Everyone benefits when you give to charity. Cash donations to qualifying charities can reduce your taxable income by up to 50 percent of your adjusted gross income (AGI).
Non-cash donations can reduce it up to 30 percent of your AGI. This makes particular sense if you own securities with a low cost basis, as you'll receive a deduction for the fair market value and avoid paying tax on unrealized gains.
3. Distribute income from trusts.
For the 2016 tax year, a trust pays tax at the maximum rate of 39.6 percent on income over $12,400. At that point, investment income is also subject to the 3.8 percent net investment income tax.
To avoid paying tax at maximum rates, you can distribute the trust's income (excluding capital gains) to the beneficiaries. The income is then taxed at the beneficiary's rate instead of the trust's.
These are general strategies—but, taxes are complicated, and there are many factors at play. Please talk to your wealth manager if you would like to explore any of these tactics. It might be more enjoyable than you think.