Year-End Planning for Medical Donations

The PATH Act of 2015 is not the only recent tax law affecting year-end planning this year. One provision of the Affordable Care Act, passed back in 2010, comes into play now. For taxpayers age 65 or older, it may pay to incur optional medical expenses by December 31, 2016.

Under the Affordable Care Act, the threshold for deducting unreimbursed medical and dental outlays was raised in 2013 from 7.5% to 10% of AGI. However, the 7.5% hurdle was kept in place for four years for taxpayers 65 or older. (Only unreimbursed medical bills greater than the threshold can be deducted.)

Example 1: Owen Palmer, age 63, has an AGI of $100,000 in 2016 and $9,500 in medical bills. For Owen, the deductibility threshold is $10,000 (10% of $100,000), so he’ll get no medical deduction.

Example 2: Owen’s neighbor Rona Sanders, has the same $100,000 AGI and $9,500 in medical bills. However, Rona is 67, so her threshold is only $7,500 (7.5% of $100,000). Therefore, Rona can deduct $2,000 of her medical costs.

Starting in 2017, the 10% threshold will apply to everyone. Therefore, seniors have an incentive to increase their medical outlays if they’ll reach the lower percentage this year. Once you’ve cleared the relevant hurdle, all medical costs will be fully deductible.

Premiums included

You might be surprised at how many expenses can be classed as medical deductions. Medicare Part B premiums, for example, count as potentially deductible medical expenses. That’s true even if you have those premiums withheld from the Social Security payments that are deposited into your bank accounts each month. The same is true for any premiums paid for Medicare Part D prescription drug plans and for money you spend directly on prescription drugs as well as for premiums paid for Medicare Supplement (Medigap) policies.

In addition, money spent on long-term care (LTC) insurance policies probably will be deductible, up to certain age-based limits. For 2016, policyholders age 41-50 can include LTC premiums up to $730 as medical expenses. The deductible amount increases to $1,460 for taxpayers age 51-60, $3,900 for taxpayers age 61-70 able to include LTC premiums, and $4,870 for taxpayers age 71 or older.

Sooner rather than later

For effective year-end tax planning, it pays to estimate your possible medical expenses for 2016 early in the fourth quarter. If you think you’ll be near or greater than the 7.5% or 10% threshold for tax deductions, push certain medical and dental expenses into November and December. Buy prescription eyeglasses, get physical exams, and so on if they’ll likely be tax deductible. If you’re nowhere near the 7.5% or 10% levels, consider deferring health care costs until 2017, when your total outlays may reach tax deductible territory.

Year-End Planning for Charitable Donations

The PATH Act, passed at the end of 2015, exempts certain IRA-to-charity transfers from income tax. For most people, moving money from an IRA to a charity is a taxable withdrawal, subject to income tax. However, once you reach age 70½, such transactions may be untaxed as a Qualified Charitable Distribution (QCD).

QCDs are now a permanent tax code provision. Everyone who passes the age test can donate up to $100,000 a year from a traditional IRA to one or more charities. A QCD generally must go directly from the IRA to an eligible charity. (Transfers to donor advised funds can’t be considered QCDs.)

At first glance, QCDs seem to be a wash. You won’t report taxable income, but you also won’t get a tax deduction for the donation. Drilling down, though, QCDs may offer tax savings to many seniors.

Itemizing not necessary

Among the beneficiaries from QCDs are the many taxpayers who don’t itemize deductions.

Example 1: Victor and Wendy Young are both age 65 or older, so they qualify for a standard deduction of $15,100 in 2016, as explained previously in this issue. The Youngs have paid off their home mortgage, so they don’t have deductible interest expenses. In retirement, the couple’s income has dropped, reducing the state income tax they pay. Consequently, the Youngs do not have enough deductions to make itemizing worthwhile, so they will take the standard deduction.

Assume that the Youngs typically make $4,000 of charitable donations during the year-end holiday season. Taxpayers taking the standard deduction get no tax benefit from charitable contributions; therefore, if Wendy Young is age 68, she will get no benefit from charitable gifts.

However, suppose that Victor Young is 72 and is eligible for QCDs. Taxpayers older than 70½ must take required minimum distributions (RMDs) from traditional IRAs; assume Victor’s RMD for 2016 is $10,000. The couple would owe tax on that $10,000 RMD, on their joint tax return. However, Victor can make their usual $4,000 of charitable donations directly from his IRA, as tax-free QCDs.

Those QCDs will count towards Victor’s RMD, so he’ll only have to take the $6,000 balance in taxable distributions from his IRA, not $10,000. Therefore, the Youngs will save tax by using QCDs. They’ll retain the $4,000 that would have passed from their checking account to charity, to spend, invest, or use for family gifts.

Adjusting income down

QCDs also can help taxpayers who itemize deductions by reducing their adjusted gross income (AGI).

Example 2. Mary North, age 75, who has a $20,000 RMD this year, plans to itemize deductions. That RMD would increase Mary’s AGI by $20,000, as reported on page 1 of her tax return.

Suppose that Mary will make $15,000 of deductible charitable contributions at year-end 2016. If Mary makes those donations from her regular checking account, the deduction for them would be included in itemized deductions on page 2 of her tax return, without affecting her reported AGI.

Instead, Mary makes her $15,000 of year-end donations as QCDs, reducing her taxable RMD to $5,000, instead of $20,000. By doing so, Mary effectively reduces her reported AGI by $15,000. A lower AGI may provide tax savings throughout Mary’s tax return. She might qualify for a larger itemized medical and dental deduction, for instance, or a larger itemized miscellaneous deduction.

Planning ahead

Although QCDs are limited to people age 70½ or older, the fact that they are now permanent can affect year-end planning for younger people as well. Taxpayers in their 60s, for example, might defer some donations to the future, when they can get the tax benefits of QCDs. That’s especially true for those who don’t itemize deductions, or those who plan large donations and also expect large RMDs.

Taxpayers younger than 70½ also may wish to reconsider year-end Roth IRA conversions. (See the article on Retirement Tax Planning in this issue.) One reason for converting some or all of a traditional IRA to a Roth IRA is to reduce or avoid RMDs because Roth IRA owners never have required distributions. However, year-end Roth IRA conversions will add to your tax bill for 2016 at your highest marginal tax rate.

Some people may decide to forgo a Roth IRA conversion and leave money to grow in their traditional IRA, tax-deferred. Once age 70½ is reached and QCDs are permitted, traditional IRA dollars can go to charity, untaxed, as QCDs. This will reduce the amount of AGI that otherwise would be reported from RMDs. Our office can help you plan for the impact of QCDs on your charitable planning, now and in the future.

Beyond QCDs

If QCDs don’t play a role in your plans, traditional strategies for year-end donations still apply. It often makes sense to donate appreciated securities to charity, rather than write checks. When you donate appreciated securities held for more than a year, you’ll get a deduction for the current value of those securities and avoid paying tax on the unrealized gains.

Donating appreciated securities to many charities can create paperwork headaches, though, so you might want to make those donations through a donor advised fund for the same tax benefit. Donor advised funds are offered by many financial firms and community organizations.

Year-End Tax Planning for Deducting Taxes Paid

As mentioned in a previous article, a new law makes the sales tax deduction permanent. Keep in mind that you deduct sales tax instead of state and any local income tax. You can’t deduct both sales and income taxes.

The new provision obviously will benefit taxpayers who live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, none of which has state income tax. If you live in such a state and it pays for you to itemize, you can deduct sales tax you paid.

Residents of other states who itemize their deductions must decide whether to deduct sales or income tax.

Example 1: As the year-end nears, Tara Lane calculates how much state income tax she will wind up paying in 2016. That includes amounts withheld from her income and any estimated tax payments. Suppose the total will be $5,000. If Tara will have paid more than $5,000 in sales tax for the year, she should deduct sales tax on her federal return. Otherwise, she should take her $5,000 state income tax deduction.

To calculate her sales tax payments, Tara can check her receipts for the year. Lacking complete records, Tara can use the Optional Sales Tax Tables, provided by the IRS in the instructions to Schedule A. Still another option is to use the IRS Sales Tax Deduction Calculator, at, which calculates the amount of the deduction based on the tables for you.

The higher your income (including tax-exempt interest income and certain other inflows), the more sales tax you’ll be assumed to have paid using the tables. Regardless of your income, however, you add the amount of tax you paid for motor vehicles (leased or purchased), aircraft, boats, residences, or home building materials to the amount from the IRS tables to determine your total allowable sales tax deduction. If all the allowable sales tax deduction amount exceeds the income tax deduction amount, deduct the sales tax rather than the income tax.

That’s where year-end planning for sales tax can come in. Buy big-ticket items before year-end if the tax on those items will be deductible. If a deduction is unlikely, you might decide to postpone the purchase until 2017.

Beyond sales tax

If you decide to deduct state and local income tax payments rather than sales tax, you might choose to accelerate estimated state and local income tax payments due in early 2017 to late 2016, increasing the deductible amount for this year. Similarly, you may be able to move scheduled property tax payments from 2017 to 2016 for an earlier deduction. Both of those tactics, though, may raise your tax bill if you’ll owe the alternative minimum tax (AMT). Our office can let you know how the AMT would affect prepaying state or local taxes.

Local Benefits Tax

  • Many states and counties impose local benefit taxes for improvements to property.
  • These taxes might be assessments for streets, sidewalks, and sewer lines.
  • You cannot deduct these taxes. However, you can increase the cost basis of your property by the amount of the assessment, which may result in a lower tax on an eventual sale of your property.
  • Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.

Year-End Tax Planning for Itemized Deductions

For 2016, the standard deduction is $6,300 for single taxpayers (and for married persons filing separately) and $12,600 for married couples filing jointly. For heads of household, the standard deduction is $9,300. People who have reached age 65 by year-end can take an additional standard deduction of $1,250, if married, or $1,550, if not married. Taxpayers who are blind also get this additional standard deduction.

Example 1: Stan and Kate Thompson are both 68 years old; they file a joint tax return. Their standard deduction for 2016 is the basic $12,600 for couples filing jointly plus $1,250 for Stan and $1,250 for Kate, for a total of $15,100. (If one of them was blind, that amount would increase by $1,250, to $16,350.)

These standard deductions are claimed by most taxpayers. However, you also have the opportunity to itemize deductions on Schedule A of Form 1040 when you file your income tax return. If the total of your itemized deductions exceeds your standard deduction, you can save tax by itemizing.

Example 2: In example 1, the Thompsons had a standard deduction of $15,100. If the amounts they could deduct on Schedule A, for medical and dental expenses; taxes paid; interest paid; charitable gifts; casualty and theft losses; job expenses; and miscellaneous deductions total $15,000, this couple will be better off by not itemizing and taking the standard deduction. On the other hand, if that total is $16,000, the Thompsons should file Schedule A and increase their tax deduction by $900: $16,000 instead of $15,100.

For effective year-end planning, estimate your potential itemized deductions for 2016 well in advance of December 31. If you see you will benefit by itemizing, you may decide to accelerate certain payments into 2016. In many cases, the extra payments will be fully deductible. Conversely, if you are far below the standard deduction amounts, you won’t get any tax benefit from, for example, writing a modest check to charity. You may decide to postpone the donation until sometime in 2017, when you might be itemizing and get a tax benefit from your contribution.

New W-2 Filing Deadline

The Protecting Americans from Tax Hikes (PATH) Act, enacted last December, includes a new requirement for employers. They are now required to file their copies of Form W-2 , submitted to the Social Security Administration, by Jan. 31. The new Jan. 31 filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation (NEC) such as payments to independent contractors.

In the past, employers typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their copies of these forms. In addition, there are changes in requesting an extension to file the Form W-2. Only one 30-day extension to file Form W-2 is available and this extension is not automatic. If an extension is necessary, a Form 8809 Application for Extension of Time to File Information Returns must be completed as soon as you know an extension is necessary, but by January 31

The due dates for filing Form 8809 are shown below:

IF you file Form(s) . . .ON PAPER, then the due date is . . .ELECTRONICALLY,
then the due date is . . .
W-2January 31January 31
W-2GFebruary 28March 31
1042-SMarch 15March 15
1094-CFebruary 28March 31
1095February 28March 31
1097February 28March 31
1098February 28March 31
1099February 28March 31
1099-MISC (NEC only)January 31January 31
3921February 28March 31
3922February 28March 31
5498May 31May 31
8027Last day of FebruaryMarch 31

If any due date falls on a Saturday, Sunday or legal holiday, file by the next business day.

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