Mid-Year Tax Planning Guide


With the month of August comes the end of summer. The days slowly begin to cool down as we all get back into our normal routines. Even though we’re only half way through 2017, it’s time to start thinking about ways to reduce your 2017 income taxes.

Currently, the federal income tax rates for this year remain unchanged from last year. The lowest rate is 10 percent. From there, it goes 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and finally, a whopping 39.6 percent.

Those who are filing as single, head of household, or jointly are affected by the 39.6 percent rate. To be taxed at the maximum rate of 39.6 percent, those filing single, head of household, and jointly must report income that exceeds $418,400, $444,550, and $470,700, respectively.

For those individuals who report high incomes, it is important to note that they may be affected by the 0.9 percent Medicare tax addition on self-employment income and wages and the 3.8 percent Net Investment Income Tax, or NIIT. On top of that, individuals must determine whether the Alternative Minimum Tax, or AMT, will affect them.

Investment Gains and Investment Losses

Presently, the federal income tax rates on capital gains in the long-term remain unchanged from 2016. The rates are 0 percent, 15 percent, and 20 percent for most categories of long-term income. Higher income earners should expect the maximum 20 percent in addition to preparing for the 3.8 percent NIIT on top of that.

Luckily, the federal income tax rate for long-term capital gains is significantly lower than the current rate on short-term gains for most taxpayers. For this reason, it’s a good practice to hold appreciated securities past 366 days before selling. Doing this will qualify you for the long-term gain tax rate.

Keep in mind that selling losing securities (securities that are currently valued at less than what you purchased them) before the end of the year could be a smart idea. Even though losing money may hurt at first, the resulting capital losses could help offset your gains from other sales in 2017. Particularly, it will help offset the short-term gains from your securities owned for less than 12 months.

Deferring Income

It could be worth your while to defer taxable income into 2018 if you anticipate staying in the same or lower tax bracket next year. This strategy works best for those who are self-employed and are a cash-method tax payer. To defer income, simply wait until the end of the year to send out select client invoices. This way, payment will not be received until the first quarter of 2018.

Retirement Plans

If you or your business does not entertain a retirement plan, it could be time to start one. The current rules for retirement plans offer significant deductible contributions. Making regular contributions to either a SEP-IRA or a SIMPLE-IRA helps reduce current income taxes in addition to adding to your retirement savings.

An SEP-IRA allows you to contribute up to 20 percent of self-employment income up to $54,000 in 2017. For those with the option of employer matching, a SIMPLE-IRA gives you the option of saving up to $12,500 in 2017 on top of the employer matching up to that full amount. Finally, if you are 50 years of age or older by the end of 2017, you are allowed an additional $3,000 contribution to your SIMPLE-IRA.

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Colonial Tax Consultants, LLC

425 S Cherry St, Suite 430

Denver, Colorado 80246
Phone: (303) 573-3755