How to Reduce Your 2016 Income Taxes (even if it is already 2017) and Plan For 2017

When was the last time your current advisor reviewed your tax return? Here at Westfield Financial Planning, part of our service promise to our clients is that we work hard to reduce their income taxes.  We review our clients’ tax returns to fulfill this promise.

Below are excerpts from our latest education mailing. If you would like to join our mailing list, please contact us at or call our offices at 908-379-2706.

The year 2016 did not generate major tax law changes. However, the year 2017 promises to be a challenging one for tax practitioners, as President Trump and Congressional Republicans have promised to enact a significant tax reform package in 2017. Even if there is no new law in 2017, tax practitioners still will have to cope with a number of tax changes that go into effect for the first time this year or apply for the first time for tax returns filed this year. Tax planning should always be an essential focus when reviewing your personal situation. However, when planning ahead for 2017 and beyond, most experts are watching for possible major changes.

Tax Law Changes

For 2016 tax filers, Congress did not enact an extenders package to revive tax provisions that expired at the end of 2016.  Provisions that changed or expired at the end of 2016 include:

  • Higher floor beneath medical expenses for seniors. For tax years beginning after Dec. 31, 2016, the floor beneath the itemized deduction for medical expenses of taxpayers who are age 65 or older increases from 7.5% of AGI to 10% of AGI. (Code Sec. 213(a), Code Sec. 213(f))
  • Some taxpayers may need new ITINs. Any individual filing a U.S. tax return is required to state their taxpayer identification number on that return. Generally, a taxpayer identification number is the individual’s Social Security number. However, in the case of individuals who are not eligible to be issued an SSN, but who still have a tax filing obligation, the IRS issues individual taxpayer identification numbers for use in connection with the individual’s tax filing requirements. (Reg. § 301.6109-1(d)(3)(i))
  • Revised due dates for partnership and C corporation returns. Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41), effective generally for returns for tax years beginning after Dec. 31, 2015 (i.e., for 2016 tax year returns filed in 2017), calendar year partnerships, as well as S corporations, must file their returns by the 15th day of the third month after the end of the tax year. (Code Sec. 6072(b)) For prior returns, partnerships had to file by the 15th day of the fourth month after the end of the tax year.

Inherited IRAs

Be careful if you inherit a retirement account. In many cases, the decedent’s largest asset is a retirement account. If you inherit a retirement account, such as an IRA or other qualified plan, the money is usually taxable upon receipt. There is no step-up in basis on investments within retirement accounts and therefore most distributions are 100% taxable.

Non-spouse beneficiaries usually cannot roll over an inherited IRA to their own IRA, but the solution to this problem can be easy: establish an Inherited IRA, also known as a “stretch” IRA. Non-spouse beneficiaries of any age are allowed to start their RMDs the year following the year the owner died and stretch them out over their own life expectancy. This will reduce your income taxes significantly compared to having all of the IRA taxed in one year.

These tax laws are very complicated and you must implement the requirements carefully to avoid any unnecessary income taxes and penalties.

Investment Income

Recent tax laws permanently raised rates on long-term capital gains and dividends for top-bracket taxpayers.  People that have enough income to pay taxes at the 39.6% rate will pay 20% in 2016 on the net long-term capital gains and dividends.

Calculating Capital Gains and Losses

Please try to double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2016, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution.  However, your 1099 might not show the correct cost basis or realized gain or loss for each sale.  You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2016 is the fourth year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single taxpayer or $250,000 as a married joint return, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower.  This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

Medical Expenses

Deducting medical expenses in 2016 has become a little more difficult. For 2016, you can only deduct them to the extent they exceed a whopping 10% of your AGI. If you or your spouse is over age 65, the old 7.5% floor still stands for 2016, but is scheduled to be gone in 2017.

Looking ahead to 2017

With Donald Trump now the 45th President and the Republicans controlling the House and Senate, many tax professionals feel we are likely to see a number of tax changes in the year ahead if his campaign plans and promises hold. President Trump’s campaign website was light on the details but the following are various tax proposals as set forth on Trump’s campaign site. Here is some of what they have proposed:

  • Federal tax rates and brackets would be simplified down to three versus the current seven today.
  • The standard deduction would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while ending personal exemptions.
  • Itemized deductions would be capped at $100,000 for single filers and $200,000 for married couples filing jointly.
  • Elimination of the 3.8% tax on net investment income on people with incomes (MAGI) of over $200,000 for single filers and $250,000 for married filers.
  • A full repeal the alternative minimum tax (AMT) and the estate tax. Under current law, estates valued at more than $5.45 million are subject to a 40% tax rate.

All final plans will need to be approved by Congress. Many times, to get wide scale tax reform passed across all branches of government, there are compromise tax plan agreements. Our goal is to keep watching these tax changes as they progress.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.  ­We suggest that you discuss your specific tax issues with a qualified tax advisor.
 Note:  The views stated in this letter are not necessarily the opinion of Westfield Financial Planning and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein.  Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary.
Sources: Wall Street Journal,, CCH Tax Briefings.   Contents Provided by The Academy of Preferred Financial Advisors, Inc 2017 © All rights reserved. Reviewed by Keebler & Associates.  ACR 231332