Nonbusiness Deductions – Your Holiday Gift to Yourself!

Looking for a little extra savings to ease the impact of post-holiday shopping bills? Start with your 2016 tax return. There are plenty of additional deductions that you can include on your return. Here’s a list of suggestions:

Make Charitable Gifts of Appreciated Stock. If you have appreciated stock that you’ve held for more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual funds because there are no transaction fees involved.)

However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy it back as this will trigger the wash sale rules. This means your loss won’t be deductible, but instead will be added to the basis in the new shares.

Maximize the Benefit of the Standard Deduction. For 2016, the standard deduction is $12,600 for married taxpayers filing joint returns. If you are single, the amount is $6,300 (unless you qualify as head of household, in which case it’s $9,300). Currently, it looks like these amounts will be about the same for 2017. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years.

For instance, you might consider moving charitable donations you normally would make in early 2017 to the end of 2016. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2017. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Manage Your Adjusted Gross Income (AGI). Many tax breaks are only available to taxpayers with AGI below certain levels. Some common AGI-based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples filing jointly and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000–$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married joint filers; $25,000 for most other filers). Also, for 2016 taxpayers with AGI over $311,300 for married joint filers, $259,400 for singles, and $285,350 for heads-of-households begin losing part of their personal exemptions and itemized deductions.

Accordingly, strategies that lower your income or increase certain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits. Managing your AGI can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for joint returns, $200,000 for unmarried taxpayers.

Managing your AGI can be somewhat difficult, since it is not affected by many deductions you can control, such as deductions for charitable contributions and real estate and state income taxes. However, you can effectively reduce your AGI by increasing “above-the-line” deductions, such as those for IRA or self-employed retirement plan contributions. For sales of property, consider an installment sale that shifts part of the gain to later years when the installment payments are received or use a like-kind exchange that defers the gain until the exchanged property is sold. If you’re age 70 1/2 or older, consider making charitable contributions from your IRA, as discussed below. If you own a cash-basis business, delay billings so payments aren’t received until 2017 or accelerate payment of certain expenses, such as office supplies and repairs and maintenance, to 2016. Of course, before deferring income, you must assess the risk of doing so.

Granted, the financial gains you get from nonbusiness deductions won’t be here in time for holiday shopping. But they can help ease your tax burden come return time a few months later.

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