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5 last minute 2016 year-end tax planning tips to reduce your tax bill
As you finish preparations for your holiday dinner and put a bow on the gift-wrapping, here are five year-end tax-planning tips to put a little more green in your stocking. Some of these tax benefits are expiring at the end of 2016. All of these were part of the “PATH Act of 2015” signed into law by President Obama on December 18, 2015.
1) Personal Energy Credit (IRC Section 25C) — This is an oldie but a goodie (for both homeowners and the plumbing-heating-cooling industry). This tax credit, introduced back in 2006, is equal to 10% of new qualifying residential energy efficient equipment with a maximum credit of $500. Energy efficient equipment includes:
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Central air conditioners, heat pumps, water heaters ($300 maximum credit)
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Natural gas, propane or oil furnaces or hot water boilers ($150 maximum credit)
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Advanced main air circulating fans used in a furnace ($50 maximum cap)
The only bad news on this credit being extended through the end of this year is that the maximum $500 credit is a lifetime credit. If you’ve taken this credit anytime in the past going back to its introduction in 2006, you’re ineligible to receive any additional credit under this code section.
2) Tuition & Fees Deduction (Higher Education Expense Deduction) (IRC Section 222) — This deduction was extended through the end of 2016. The deduction limit is $4,000 for those whose adjusted gross income is $65,000 or less (single and head of household), $130,000 or less (married filing joint/surviving spouse).
The higher education expense deduction limit is $2,000 for those whose adjusted gross income is $65,001-$80,000 (single and head of household), $130,001-$160,000 (married filing joint/surviving spouse). NOTE: This isn’t just for college or university educational expenses. Amounts paid to vocational schools qualify too! (Another plus for our industry!)
3) Qualified Charitable Distributions from IRAs — This exclusion was made permanent when the PATH Act was signed. It allows those individuals 70 ½ and older who take an IRA distribution of up to $100,000 and donate that distribution to a qualified charity to exclude that amount from their gross income. Since this is per individual, married couples can designate $100,000 each or up to $200,000 if they qualify. Since this reduces your adjusted gross income (AGI), you may also benefit in other areas on your tax return because it helps reduce the chances your AGI exceeds thresholds that may reduce other tax benefits. NOTE: Since these amounts are excluded from your gross income, you do not get to take those amounts as charitable donations on Schedule A. Still, this is effectively a 100% deduction because it is reducing your income.
4) IRC Section 179 Expense — This is one with which most business owners are familiar. This is the code section that allows you to immediately expense certain assets you purchase during the year instead of depreciating them over a number of years. In many cases, you’re immediately deducting 100% of the purchase price of the asset. The PATH Act made this deduction permanent and locked in higher (more favorable) limits. For 2016, the maximum Section 179 deduction is $500,000 with a maximum total asset purchase of $2 million. This deduction will now be indexed for inflation. (For 2017, the amounts will be $510,000 and $2.03 million, respectively.)
Also, the expensing (deducting) of off-the-shelf computer software is now permanently allowed. So, for those of you considering year-end purchases of vehicles, equipment or software, you now have some tax incentives available to you.
5) Bonus Depreciation — The PATH Act revived bonus depreciation that had expired as of December 31, 2014. It has retroactively been brought back for five years for property placed in service on or before December 31, 2019. Bonus depreciation allows you to immediately depreciate (expense/write-off) a percentage of the asset purchase price prior to calculating the “normal” depreciation deduction for the year. This can be used in conjunction with the Section 179 deduction or on its own.
For property placed in service on or before December 31, 2017, the bonus depreciation percentage is 50%. For property placed in service in 2018, the percentage drops to 40% and then down to 30% for 2019. Bonus depreciation goes away after 2019.
New automobiles (not trucks or vans) eligible for bonus depreciation get an increase in their first year depreciation of $8,000. The maximum annual depreciation deduction limits for automobiles are:
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Year placed in service - $3,160 ($11,160 with bonus)
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2nd year - $5,100
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3rd year - $3,050,
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and $1,875 for each succeeding year.
Bonus tip
Finally, one of my favorite suggestions when it comes to year-end tax planning is to make sure that you’ve maximized your contributions to a retirement plan account. Check out the accompanying table that summarizes information on each type of retirement plan.
NOTE: The compensation limit for defined contribution plans for 2016 is $265,000 and the maximum deductible contribution for 2016 is $53,000. The compensation limit for defined benefit plans is $215,000 for 2016.
That’s just a few of the year-end tax planning tips available for you. There’s not much time left to act before the year comes to a close. So, after you finish wrapping those gifts and setting the table, reach out to your accountant or tax preparer and discuss how you can reduce your tax bill for 2016.
"This article is not intended to be comprehensive in nature and competent professional tax advice should be sought in determining the issues that impact your specific situation."
Michael A. Bohinc is a certified public accountant in Cleveland, Ohio. He is the Chief Financial Officer of Norhio Plumbing, Inc. in Aurora, Ohio. He is an instructor for the PHCC Educational Foundation on business topics. Michael is also an Advisor for the Service Nation Alliance & Service Roundtable. He has 28 years’ experience working on accounting, business management and tax issues in the plumbing-heating-cooling industry. He can be reached at: 440/708-2583, e-mail: [email protected]
Michael Bohinc | CPA and CFO
Michael Bohinc is a Certified Public Accountant in Cleveland, Ohio, and the owner of Keeping Score Inc. He has served as the Chief Financial Officer of Norhio Plumbing Inc., his family’s plumbing company in Aurora, Ohio, since 1988. A veteran speaker, he's trained hundreds of contractors in the basics of accounting and on fraud prevention. He also currently serves as the Interim Director for the Service Nation Alliance – Plumbing Group. He's also a die-hard Cleveland Indians fan. You may contact him via e-mail at [email protected].