As with prior years, 2016 year-end planning should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life cycle plans. If the general goal for year-end planning has been to balance taxable income between the current and upcoming year to the extent tax bracket rates are equal, then planning at year-end 2016 presents a choice between using the President-elect Trump/House GOP Blueprint rates as a target or a more conservative approach that moves more taxable income beyond an ideal balance into 2017, but not necessarily counting on a final tax bill arriving at a 12, 25 and 33 percent rate structure for individuals; and a 15 or 20 percent rate level for businesses, depending upon the president-elect or House GOP blueprint versions. Within those goals, use of traditional techniques to move income recognition into 2017 and beyond or to accelerate deductions into 2016 could have particular relevance at year-end 2016.
Income deferral techniques, among others, include:
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, under the tax laws applicable during those future years. This technique is particularly valuable if tax cuts are not made effective immediately in 2017 since installment payments in 2018 and beyond could all the more likely to be subject to lower tax rates.
Bonuses. If an employer is persuaded to delay paying out a bonus at year end until up to 2 ½ months into 2017, the employee will be taxed in 2017. For this strategy to work, however, the deferral must be made before the bonus is due and payable; and, generally, the bonus must be paid within the first 2 ½ months in 2017 to avoid tripping over the nonqualified deferred compensation rules.
Billing for services. Cash-basis taxpayers in the business of providing services might consider delaying the recognition of service income at year end by billing out late in the year or even into early 2017 for those services performed in late 2016.
U.S. 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 postpone issuing a Form 1099-C, Cancellation of Debt, until the 2017 tax year, might form part of the process. Note that final regulations in November 2016 removed the rule under which a deemed discharge of indebtedness, reportable on Form 1099-C, occurs at the expiration of a 36-month nonpayment testing period.
Like-kind exchanges. Taxpayers who want to delay recognition of income on the sale of business or investment property should consider a like-kind exchange conforming to Code Sec. 1031. Code Sec. 1031 treatment is mandatory if its requirements are met, so “breaking” one of the rules is necessary to recognize income in 2016. In addition, proposals to limit to use of like-kind deferral to $1 million, and exclude art and collectibles from like-kind treatment, could be under consideration in the future.
First-year required minimum distributions. Individuals who first reached age 70 1/2 in 2016 can delay taking required minimum distributions (RMDs) from qualified retirement plans otherwise due in 2016 until 2017. Of course, they will then be required to double-up in 2017 and take distributions for 2016 and 2017 in 2017.
Roth IRA conversions. Conversions from traditional IRAs to Roth IRAs are taxable in the year of conversion. Individuals therefore should consider delaying conversions into 2017. Individuals who already converted to Roth IRAs in 2016 can reconvert back into a traditional IRA by year-end 2016 and avoid any 2016 income recognition. A follow up conversion, however, would then generally not be permitted for at least 30 days.
The following deduction acceleration techniques, among others, could also be considered to offset 2016 income possibly taxed at higher rates than in 2017:
Bunch itemized deductions into 2016/Standard deduction into 2017. This traditional technique designed to maximize both itemized deductions and the standard deduction could have even greater benefits, as President-elect Tramp proposed during the campaign a significant increase in the standard deduction to $15,000 for single taxpayers and $30,000 for joint filers. In addition, it could be more difficult for higher-income taxpayers to claim itemized deductions under another proposal during the campaign by President-elect Trump that would impose a dollar cap itemized deductions.
Don’t delay deductible payments until 2017. Paying medical bills (and accelerating elective medical treatment), making charitable contributions, paying the last state estimated tax installment, are among time-tested techniques. Taxpayers can write a check or can charge an item by credit card and treat these actions as payments.
Adding to year-end uncertainty is the fate of the remaining tax extenders. Congress could extend these incentives before year-end or wait until 2017 and take up the extenders in a broader tax bill. Many of the remaining extenders are related to energy-efficiency and alternative fuels.