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How Do I...Shift Taxable Income into 2016?

As the calendar approaches the end of 2015, it is helpful to think about ways to shift income and deductions into the following year. For example, spikes in income from selling investments or other property may push a taxpayer into a higher income tax bracket for 2015, including a top bracket of 39.6 percent for ordinary income and short-term capital gains, and a top bracket of 20 percent for dividends and long-term capital gains. Adjusted gross incomes that exceed the threshold for the net investment income (NII) tax can also trigger increased tax liability. Accordingly, traditional year-end techniques to defer income or to accelerate deductions can be useful.

Techniques for deferring income include:

  • Hold appreciated assets;
  • Consider a tax-fee like-kind exchange or property if disposing of appreciated assets used for investment or in a business;
  • Sell depreciated capital assets, especially if capital gains have been realized;
  • Hold U.S. savings bonds;
  • Sell property on the installment basis;
  • Defer bonuses earned in 2015 until 2016;
  • Make salary-reduction contributions into employer-sponsored plans, such as 401(k) plans, 403(b) plans, and 457 plans, and into flexible spending accounts;
  • Minimize retirement distributions;
  • Defer billings and collections;
  • Recharacterize a Roth IRA as a traditional IRA if the traditional IRA was converted to a Roth IRA in 2015, and the assets in the Roth IRA have subsequently declined in value.

It is important to monitor the progress of tax legislation. Congress has not yet renewed individual and business tax extender provisions that expired at the end of 2014, but historically Congress does renew these provisions. Extenders for individuals include the state and local sales tax deduction (in lieu of the state and local income tax deduction), the higher education tuition and fees deduction, the teacher's classroom expense deduction, and the residential energy property credit.

Techniques for accelerating deductions include into 2015:

  • Bunch itemized deductions into 2015 by paying medical expenses, making charitable contributions, and paying miscellaneous expenses such as employment-related items (don't delay bill payments until 2016);
  • Accelerate payments of state and local taxes by increasing withholding or making the final state estimated tax payment installment in 2015;
  • Make payments/contributions by credit card (timing is based on payment by credit card, not on payment of the credit card bill);
  • Use Code Sec. 179 for business expensing and bonus depreciation to write off the costs of newly-acquired equipment.