Dec 1, 2016 4 min read

Decisions made in early December can make a big impact on the amount of taxes you will pay for 2016. Every year, life changes in some manner. If you started a new job, bought a house, got married or divorced, retired or any other major changes, your taxes could be radically different than in the past.

Most people miss major opportunities because they do not consider the tax effect of these changes. They simply gather their tax information at the end of January and take it to their preparer. All that can be done then is to use the tax law to try to pay the lowest tax. This is reactive tax planning

It is much better to be proactive and make decisions that will reduce taxes intentionally. The tax code is about 15,000 pages long, and can be very confusing. Which strategy you choose will be based on the type of money and whether you plan to use it or pass it on as a legacy.

The three types of money are qualified (IRAs, 401(k)s, etc.); non-qualified (left over from paycheck after paying taxes; and Roth IRAs.

With qualified money, you must pay taxes when you take control of it. If you will need to spend this money during retirement, you might want to bump the tax bracket and get it out at the lowest possible tax cost.

The United States has a progressive tax system where you pay a higher tax as you surpass certain income limits. You do not pay the highest tax rate on all of your income. Bumping the bracket assumes that your income will usually reach a certain level every year. You withdraw extra from a qualified account, but do not exceed that bracket level. If you are not going to need to spend some qualified accounts, you may want to stretch them so that they continue to grow for your beneficiaries.

Non-qualified money is taxable only on the gain. It also receives favorable tax treatment with long-term capital gains and qualified dividends. If you are in the 10 to 15 percent income tax brackets, this means zero taxes are due. Non qualified money is the cheapest to get your hands on, so consider different investment vehicles than you would use for qualified income. Non-qualified money must be much more liquid.

Roths have no taxes on gains if you have owned them at least five years and are age 59 1/2.

You do not get a tax break when you contribute and they have no required minimum distributions during your lifetime. Required minimum distributions are an important consideration on your qualified money if you are age 70-1/2 or older. If you are at this age and you have not received them for this year, contact your custodian immediately. You must receive them by the end of the year. If you miss this deadline, the penalty is 50 percent of the amount you did not take plus the tax on the whole amount. It takes some time to receive this payment, and many companies have smaller staffs during the holidays.

Last year, Congress made permanent a law that had been passed on a yearly basis for a while. If you are age 70-1/2 or older and do not need your required minimum distribution, you can give up to $100,000 from your IRA to a charity. While you do not get a tax deduction, you do not have to recognize receiving these funds.

This could fulfill your required minimum distribution requirements and possibly save taxes on Social Security and adjusted gross income phaseouts.

There are many other tax planning opportunities. They need to be completed before Dec. 31. If your retirement plan does not consider reducing taxes, it is missing a valuable component.

There are definitely tax planning opportunities for younger workers also. Be sure and consult with a qualified tax professional.

Gary Boatman is a Monessen-based certified financial planner. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com.