Year-End and Ongoing Tax Planning Considerations
Tax planning needs to be an ongoing process, one that takes into consideration both the continually evolving political, fiscal, and legislative environment and changes in your own personal circumstances, needs, and goals. The following section outlines a number of tax planning ideas that may help you reduce not only this year’s tax bill but your tax liability in future years.
Prepare a Tax Projection
The first step in tax planning is to project what you will pay in taxes this year. Determine your estimated marginal tax rate—the percentage of tax you will pay on your last dollar of income (meaning the tax bracket your last dollar of income falls into, and therefore the highest tax rate you pay). Then, think about whether your marginal tax rate will likely go up or down next year. In doing so, consider the significant difference between the tax rate on your ordinary income (up to 39.6% in 2017, plus, if applicable, 3.8% Net Investment Income Tax (NIIT) on net investment income (NII)) and the rate on your long-term capital gains and qualified dividends (generally 15%, with the highest tax rate at 20% for taxpayers who are otherwise subject to the 39.6% marginal rate on ordinary income, plus, if applicable, 3.8% NIIT on gains and dividends treated as NII).
Consider building out your tax projection to cover the next few years, not just to see what your overall taxable income could be, but to gain a deeper perspective on the composition of that income and how future tax law changes could affect it. You should also look at your investment asset allocation and asset location. The former is about what you own. The latter is about where and in what types of accounts you own your investments. Take care not to make short-term, tax-driven decisions today that may undermine your overall financial goals tomorrow. By doing these analyses and assessments, you can effectively position yourself to determine what, if any, adjustments you should consider for tax and investment planning.
Tax planning often, but not always, involves deferring income and accelerating deductions. It can also involve shifting income to a person in a lower tax bracket and repositioning an appropriate portion of your portfolio from investments that generate ordinary taxable income to those that may create capital gains and produce tax-exempt income. Generally, you want to recognize income in years in which your tax rate is comparatively low and pay deductible expenses when your tax rate is comparatively high. Only when you understand your current situation can you evaluate whether the tax law provides any incentives for taking action this year.
Ways To Postpone or Reduce Income Subject To Tax
Defer interest income. Consider purchasing a short-term certificate of deposit (CD) that matures in the following year. None of the interest earned will be subject to tax in the year you bought the CD, provided any interest received this year would be penalized by the issuer of the CD. Buying tax-deferred U.S. Treasury securities, such as Series EE or Series I bonds, is another way to defer interest income.
Evaluate the effect of the lower tax rate for qualified dividends. For taxpayers subject to the 25%, 28%, 33%, or 35% tax brackets on ordinary income, qualified dividend income—but not interest income—is taxed at a top income tax rate of 15%. For high-income taxpayers who are otherwise in the 39.6% regular income tax bracket (i.e., in 2017, taxable incomes over $418,400 for individual filers, $444,550 for heads of households, $470,700 married filing jointly, and $235,350 if married filing separately), the tax rate is 20% on qualified dividends. Qualified dividends received by taxpayers in the 10% and 15% tax brackets are taxed at a zero rate. These preferential tax rates on qualified dividend income apply to both the regular tax and the alternative minimum tax. The lower tax rates for qualified dividends means that you should consider dividends, as well as long-term capital gains (discussed next) when evaluating the tax considerations in a year-end sale of stock. A number of tests must be met for a dividend to qualify for the reduced tax rates. See Qualified Dividends in chapter 8, Dividends and other corporate distributions, for more information.
Qualify for the lower long-term capital gains rates. The maximum federal income tax rate on gains from sales of most types of investments held longer than 12 months is 15% for taxpayers who are otherwise subject to the 25%, 28%, 33%, or 35% tax brackets on ordinary income. Net long-term capital gains are taxed at a maximum rate of 20% for high income taxpayers who are otherwise in the 39.6% regular income tax bracket (i.e., in 2017, taxable incomes over $418,400 for individual filers, $444,550 for heads of households, $470,700 if married filing jointly, and $235,350 if married filing separately). The rate on net capital gains received by taxpayers in the 10% and 15% tax brackets is zero. The 12-month period begins the day after you buy the property. When selling securities, ignore the settlement date. The trade date determines the date of disposition.
Identify shares of stock and mutual funds that you want to sell to maximize tax benefits. If you want to sell shares that you purchased at different times, select those in which you have a high tax basis in order to reduce taxable gain or increase a tax loss that can be used to offset other taxable income. Also, consider whether you have held the shares long enough to take advantage of the preferential long-term capital gains rates, described above.
Use your capital losses. If you had capital gains this year, consider offsetting those gains by selling property in which you have unrealized capital losses. You can offset capital losses against capital gains dollar for dollar. You can also use capital losses in excess of capital gains to offset up to $3,000 of ordinary income (for example, wages, interest, etc.) each year. Doing so may save you nearly $1,200 in federal income tax (if you are in the top tax bracket). Any unused capital losses are carried forward for use in future tax years.
Take a capital loss on worthless securities. If you have investments that became worthless during the past year, the tax code treats you as having realized a loss as of the last day of the year. This rule applies only if the investments have no value; even if your investments are worth only pennies, they will not be considered worthless for tax purposes. To ensure that you can utilize the loss on an investment that has dramatically declined in value but is not worthless, sell the investment to an unrelated party before the end of this year.
Don’t be caught by the “wash-sale” rule. If you sell securities to realize a tax loss, make sure you do not purchase the same or substantially similar securities within 30 days before or after the date of sale. If you do, you will not be able to claim the loss on this year’s tax return.
Properly time your year-end investments in mutual funds. Mutual funds generally make distributions to investors holding shares on a record date near year-end. If you want to invest in a fund, but would be subject to tax on such a distribution (that is, your investment will not be held in a 401(k) or other tax-deferred or tax-exempt vehicle), wait until after the record date before making your purchase. If you plan to sell a substantial interest in a mutual fund near year-end, consult with your tax advisor as to how the sale might affect whether dividends from that fund are qualified dividends (subject to the reduced maximum federal tax rates).
Review how investments are allocated among taxable and tax-deferred accounts. Distributions from tax-deferred accounts, such as traditional 401(k) plans, are taxed at ordinary income tax rates. This is true even if the income in those accounts consists of long-term capital gains and qualified dividends that would otherwise have been eligible for the reduced federal income tax rates described earlier in this section. From a tax perspective, it may be beneficial to hold investments that generate long-term capital gains and qualified dividends in taxable accounts, while holding investments that generate short-term gains, interest, and other ordinary taxable income in your tax-deferred accounts. Since there may be significant investment and tax considerations involved in shifting assets, speak with your tax advisor before taking any action. However, you may be able to make prospective changes—e.g., allocating part of your future 401(k) contributions into a Roth account—that can help diversify the tax attributes of your investments without disturbing your previous tax-free contributions.
Review your stock options. Don’t overlook your options or option shares when you do your year-end tax planning. There may be opportunities to avoid or minimize regular income tax or alternative minimum tax (AMT) by taking action this year.
Use flexible spending plans. These plans permit you to pay for eligible health care and dependent care expenses with pre-tax wages. The amounts you contribute to these plans are not subject to federal income, social security, or Medicare taxes. If your employer sponsors this type of plan and you contributed to it during the year, make sure you incur sufficient qualifying expenses by year-end or you will forfeit any unused funds. Your employer may provide you with an option to either use unspent funds to cover expenses incurred up to 2½ months following the end of the plan year (March 15 of the following year for plan years ending on December 31) or to roll over up to $500 to the next plan year (without reducing your maximum allowed contribution for the new plan year). But your employer cannot offer both options.
Properly characterize alimony. Alimony payments are deductible to the payer and includible in the income of the person who receives them. When the recipient is in a low tax bracket, there may be a net tax benefit that the payer and recipient can share. This will occur only if the payments can be properly characterized as alimony rather than a property settlement or child support. Before you finalize a divorce or separation agreement, discuss with your tax advisor whether a portion of any payments may be deductible alimony.
Review the use of deferred compensation agreements. If you and your employer are willing to defer a portion of your future earnings, you may be able to use a written deferred compensation agreement to defer tax. To obtain the tax benefit, you must accept some risk that you may not receive the payments and be subject to strict rules on when the compensation can be paid. Using certain irrevocable trusts to fund the deferred compensation can minimize certain risks, though it will not protect against the risk that the deferred income may be subject to the claims of your employer’s creditors.
Speak with your tax advisor if you are currently using, or considering entering into, this type of agreement, as the tax rules governing these arrangements are complex. Failure to adhere to these rules may trigger current income tax on amounts deferred, as well as substantial penalties and interest.
Review the special rules for inherited property. Most investment property you inherit will be valued for capital gains purposes as of the date of the previous owner’s death. In almost all situations, if inherited property is sold for a price above this value, the gain will qualify for taxation at long-term capital gains rates. This is true no matter how long you or the person from whom you inherited the property held it.
Ways To Accelerate Income
Accelerating income can be the better tax-planning approach if you expect that your tax rate this year will be significantly lower than your rate in the near future. If you were not working for a portion of the current year or anticipate a substantial increase in income next year, you may be in a higher tax bracket next year. If you’re in such a situation, consider the following:
- Redeem savings bonds. If you have not reported interest earned on Series EE savings bonds in prior years, you can redeem the bonds and report all the accrued interest in the current year.
- Accelerate IRA distributions. If you are 59½ or older and have a traditional Individual Retirement Account (IRA), you may be able to increase your income for this year without penalty by making withdrawals from the account. Consult with your tax advisor before making withdrawals. Additionally, converting your IRA to a Roth IRA or your 401(k) to a Roth 401(k) (if your plan allows such conversions) would also be a way to accelerate income.
- Exercise stock options. If you own nonqualified stock options, consider whether, from an investment perspective, this might be a good year to exercise those options. Exercising appropriate options will generate taxable income. Regular taxable income is generally not triggered on the exercise of incentive stock options (ISOs), although do keep in mind that exercising ISOs could trigger AMT liability.
Make the Most of Your Deductions
Identify all above-the-line deductions. There are a number of “above-the-line” deductions that are available whether or not you claim itemized deductions on your tax return. These deductions are particularly valuable because they reduce your AGI, which can help increase the value of other tax breaks. Above-the-line deductions include deductions for moving expenses, self-employed health insurance premiums, and Keogh, SEP, and SIMPLE plan contributions.
Bunch your itemized deductions. Each year you are entitled to take either your itemized deductions or the appropriate standard deduction on your return. Review your tax returns for the last few years. If your itemized deductions have been approximately the same as the allowable standard deduction, you may be able to save taxes by “bunching” your itemized deductions in alternate years.
Properly establish deductions. If you pay deductible expenses by check, make sure the checks are delivered on or before the end of the year. If you send checks by mail, they will be deemed to have met this deadline if mailed by December 31. If you pay with a standard credit card, the charge date controls. You need not pay the credit card bill before year-end to take the deduction this year.
Evaluate when to incur discretionary medical expenses. Only unreimbursed medical expenses in excess of 10% of your AGI may be claimed as a deduction. (For purposes of the AMT, medical expenses are deductible only to the extent that they exceed 10% of AGI, regardless of your age.) If you have the choice to incur medical expenses either this year or next, consider whether bunching these expenses into the same year is feasible and can surpass the threshold. For the year you estimate your medical expenses paid will beat the threshold, consider making additional purchases of discretionary (but not purely cosmetic) medical products and services before year-end. Allowable expenditures include those for prescription drugs, eyeglasses, hearing aids, laser eye surgery, weight-loss programs to combat medically diagnosed obesity, smoking cessation programs, annual physicals, health insurance programs, and certain payments and insurance premiums related to long-term care services. The IRS has ruled that the costs of medically necessary equipment (for example, crutches), supplies (for example, bandages), and diagnostic devices (such as blood pressure monitors), even if not prescribed by a physician, can be deducted as medical expenses.
Consider accelerating deductible tax payments. To increase your deduction for state or local income taxes, you need to make estimated tax payments or increase withholdings on or before year-end. Most state and local property taxes and foreign income taxes are also deductible. If you have control over any of these taxes, consider paying them before year-end, unless you think you’ll be subject to the AMT.
Maximize the residential interest expense deduction. Interest on loans used to acquire, construct, or substantially improve your principal residence and one other residence is, within statutory limits, deductible if paid during the year. (See Amount deductible, in the Home Mortgage Interest section of chapter 24, Interest expense, for more information about the applicable limits.) Interest on an additional $100,000 of home equity indebtedness is also deductible. You may be able to accelerate deductions to this year by making the mortgage or home equity loan payment due in January on or before the end of the current year.
If you are considering refinancing an existing mortgage, you should note that only a portion, if any, of prepaid interest in the form of “points” may be deductible in the year you refinance. For this reason, you may want to look at a “no-points” loan if you are refinancing.
Generally, you can deduct the entire amount you pay as points if the loan is used to buy or improve your principal residence and the loan is secured by that home. If you satisfy the requirements for deductibility, try to close on the loan before year-end so you can deduct all the points on this year’s tax return.
Deduct a greater amount of certain capital expenditures: Section 179 expensing and the special depreciation allowance.
Section 179. Business owners may be able to save on this year’s taxes by making certain capital expenditures before year-end. While capital expenditures (such as furniture or equipment) must ordinarily be depreciated over a set period of time, Section 179 of the tax code allows you to deduct all or part of the cost—up to specified yearly limits—of certain qualifying property in the year in which the property is purchased and placed into service, rather than capitalizing the cost and depreciating it over its life. This means that you can deduct all or part of the cost up front in one year rather than taking depreciation deductions spread out over many years. You must decide for each item of qualifying property whether to deduct (subject to the yearly limit) or capitalize and depreciate its cost.
Eligible property includes tangible personal property (i.e., tangible property that is not real property) and certain other specified tangible property.
The maximum amount you can elect to deduct for Section 179 property placed into service in 2017 is $510,000. For enterprise zone business, this amount is increased by the lesser of (1) $35,000, or (2) the cost of Section 179 property that is qualified zone property placed in service during 2017. The allowable deduction is reduced dollar for dollar once the cost of qualifying property placed into service during 2017 exceeds $2,030,000. There is a 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
For more information about the Section 179 deduction, see Depreciation and Section 179 deduction, in chapter 13, Basis of property, and Publication 946, How To Depreciate Property.
Special depreciation allowance. The Protecting Americans From Tax Hikes Act of 2015 that was enacted in late 2015 extended the availability of the special depreciation allowance (also known as bonus depreciation) under Section 168(k) for property acquired after December 31, 2007, and placed in service before January 1, 2020. Fifty percent bonus depreciation is available for property placed in service during 2015, 2016, and 2017. This then decreases to 40% in 2018 and 30% in 2019. The types of property that qualify for the 50% bonus or special depreciation allowance are Section 168 (tangible) property with a recovery period of 20 years or less, off-the-shelf computer software, water utility property, and qualified leasehold improvement property. The rules for claiming the special depreciation allowance are complex. See Publication 946, How To Depreciate Property, for more information.
Make year-end charitable gifts. Make your contributions in the most tax-efficient manner. In addition to cash, gifts of property (such as clothing, equipment, or investment securities) can qualify for a charitable deduction.
You can claim a charitable deduction for contributions of clothing and household items (for example, furniture, furnishings, electronics, appliances, linens, and similar items) only if the item is in good used condition or better. An exception to this general rule permits a deduction if the amount claimed for the item is more than $500 and a qualified appraisal is obtained.
If investment securities you have held more than one year have appreciated, donate the actual securities, not the proceeds from selling them, to charity. You get a charitable deduction for the value of the securities and avoid paying income tax and, if applicable, the 3.8% NIIT, on the appreciation. This strategy can be even more valuable if you donate property, such as a collectible, that would not qualify for the 15% (20% for high-income taxpayers who are otherwise in the 39.6% regular income tax bracket) maximum federal tax rate on long-term gains (gains on collectibles are taxed at 28%). However, a deduction for the fair market value of appreciated tangible personal property donated to charity is allowed only if the charity uses the property as part of its exempt function (for example, a gift of modern art to a museum).
If investment securities are worth less than your cost, it is usually better to sell them and donate the proceeds. The charity will receive the same value, and you will recognize a capital loss that may be used to offset other income.
You may also want to prefund charitable gifts for the next few years. By establishing a private foundation or contributing to a donor-advised fund, you can obtain the full charitable tax deduction this year, while you retain the ability to identify one or more charitable organizations as recipients in the future.
Consider the Impact of the AMT
The AMT was designed to ensure that the highest-income taxpayers pay at least a minimum amount of income tax. The AMT is an alternative income tax calculation that limits or disallows certain deductions, credits, and exclusions available under regular income tax to arrive at AMT income subject to tax at 26% or 28% rates. It is effectively a separate tax system with its own allowable deductions and exclusions, many of which are different than those allowed for regular income tax purposes. You might be subject to AMT if:
- Long-term capital gains and/or qualified dividends are likely to be a substantial portion of your total income for the year;
- You claim large deductions for state and local taxes or large miscellaneous itemized deductions;
- You pay interest on a mortgage and the loan proceeds have not been used to buy, construct, or improve your home;
- You exercised, or will exercise, incentive stock options this year.
- To the extent AMT is triggered by adding back designated itemized deductions and other so-called exclusion items that reduce your taxable income for regular tax purposes but are not allowed for determining alternative minimum taxable income, consider the following to help minimize the impact of the AMT:
- Postponing the payment and recognition of such deductions to a tax year in which you will not be subject to the AMT. Shifting these deductions to a non-AMT year can save you up to 39.6% of the deduction claimed, assuming you are in the top tax bracket. On the other hand, these deductions forfeit their tax benefits if they are recognized in an AMT year.
- Accelerating income into the AMT year until your regular tax is equal to your AMT attributable to itemized deductions and other exclusion items. This accelerated income would be taxed at the 26% or 28% AMT rates, albeit a year earlier than it would otherwise be subject to regular income tax at higher tax rates.
See Alternative Minimum Tax, in chapter 31, How to figure your tax, for a detailed discussion about the AMT.
Review Available Education Incentives
Investigate Coverdell education savings accounts. Contributions to Coverdell accounts grow tax-free when distributions are used to pay qualifying educational expenses. You can use these accounts to pay for elementary and secondary school expenses as well as for higher education expenses. You can even use the accounts to purchase a computer or pay for Internet service for your child. The maximum annual contribution for each designated beneficiary is now $2,000. Unfortunately, the ability to make contributions is phased out at higher income levels.
Contribute to a qualified tuition (Section 529) plan. You can help your child, grandchild, or other individual save for higher education by making a gift to him or her through a qualified tuition plan. These plans are commonly called Section 529 plans, a reference to the section of the Internal Revenue Code that authorized the plans. There are two general categories of Section 529 plans: prepaid plans (which involve the purchase of tuition credits or certificates) and college savings plans (in which contributions are made to an account that is invested in mutual funds or other financial instruments).
College savings plans are the most rapidly growing type of Section 529 plans. As with a Coverdell account, earnings in these plans can grow tax-free when distributions are used to pay qualifying educational expenses; that is, no federal income tax is imposed when distributions are used to pay qualifying higher education expenses. Unlike the Coverdell program (and most other tax incentive programs for education), you may make contributions to a college savings plan regardless of the amount of your income.
While contributions to Coverdell accounts are capped at $2,000 annually, you can at any time contribute a lump sum to a college savings plan in an amount that may be sufficient to pay the entire future college expenses of the designated beneficiary. Contributions are not deductible on your federal income tax return but may be deductible on your state income tax return. Under a special gift-tax rule, you can make a contribution of up to five times the annual per-donee gift tax exclusion. For 2017, you can contribute up to $70,000 per beneficiary ($140,000 for a married couple who elect gift-splitting) without paying gift tax or using any portion of your lifetime gift tax exemption. Keep in mind that this special gift-tax rule is an election that needs to be made on a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
There are many meaningful differences among the available Section 529 plans, and many states offer incentives of their own. Consult with your tax advisor to get help in determining which option may be best for you.
IRA and Other Retirement Account Contributions
You do not have to make contributions to traditional IRA and Keogh plans by year-end to offset current-year income, as you have up until the due date of your income tax return to make those contributions. There are, however, a number of important year-end considerations related to contributions to these and other retirement plans.
Determine if you satisfy income limits for contributions. See if you are eligible to make a deductible contribution to a traditional IRA (for 2017: $5,500; $6,500 if you’re at least age 50 by the end of the year) or to make a nondeductible contribution to a Roth IRA. If you are an active participant in a qualified plan, you cannot deduct contributions to a traditional IRA if your income exceeds certain amounts. (See What’s New for 2017, in chapter 17, Individual retirement accounts (IRAs), for the modified AGI limits applicable for 2017.)
Regardless of whether you are an active participant in a qualified plan, you can make an unreduced contribution to a Roth IRA if you are single and, for 2017, your modified AGI is under $118,000, or if you are married and filing jointly and your modified AGI is under $186,000. Your maximum allowable contribution to a Roth IRA is phased out depending on the amount of your modified adjusted gross income and your filing status. (See What’s New for 2017, in chapter 17, Individual retirement accounts (IRAs), for the modified AGI limits applicable for 2017.)
Evaluate converting to a Roth IRA. Unlike distributions from a traditional IRA, qualified distributions from a Roth IRA are not subject to tax (i.e., the funds are not withdrawn until age 59½ and at least 5 years from the date of conversion. Tax-free distributions may also be made under other circumstances, such as disability.) You will have to pay income taxes currently on the taxable amounts converted, except to the extent it includes nontaxable amounts (e.g., after-tax contributions).
Fully fund your workplace 401(k) account. For 2017, your 401(k) plan may allow you to save up to $18,000 of your salary ($24,000 if you will be at least age 50 by year-end) on a pre-tax basis. Unlike IRA contributions, 401(k) deferrals for the current year may only be made during this year. If you have a 401(k) plan, make sure you have deferred the maximum amount that is allowable under your plan, and that you can afford, before year-end.
Consider contributing to a Roth 401(k), if available. Employers can offer participants in their company’s 401(k) plan the ability to designate some or all of their 401(k) contributions as “Roth 401(k)” contributions. These contributions do not reduce current taxable wages, but, if certain requirements are met, all future earnings from investments held in a Roth 401(k) account can be distributed completely tax-free. The requirements for this tax treatment are similar to those that apply to Roth IRAs. However, unlike with Roth IRAs, the ability to contribute to a Roth 401(k) account is not limited by your AGI. Your tax advisor can help you evaluate whether, based on your particular situation, contributing to a Roth 401(k) account may be more beneficial than making pre-tax contributions to a traditional 401(k).
Establish a solo 401(k). This type of 401(k) allows self-employed individuals with no employees (or who work with their spouse) and limited income to save more than traditional retirement plans allow and take advantage of tax-deductible contributions. With a solo 401(k) plan, you can make the full allowable employee contribution and match that with an additional employer contribution of not more than 25% of your income, with a combined inflation-adjusted maximum limit of $54,000 in 2017 ($60,000 if you will be at least age 50 by year-end).
Retirement Distribution Planning
Retirement assets make up the largest component of wealth for a significant number of individuals. Many taxpayers do not realize, however, that making the right distribution choices can substantially reduce taxes and even significantly enhance the lifestyle that they can enjoy in retirement.
Take advantage of the rules on required minimum distributions. The tax laws mandate when you must begin taking taxable distributions from your retirement plans and how much you must take out each year. The amount you must take from your plans each year may be minimized with proper planning. Speak with your tax advisor to see if you can enjoy tax benefits by deferring a portion of these taxable distributions.
Consider the effect of taking a lump-sum distribution. If you are retired and were born before 1936, discuss with your tax advisor whether you should take a lump-sum distribution from your retirement plan.
Evaluate if you should take a distribution in company stock. There may be tax advantages in taking a taxable lump-sum distribution of your company’s stock from your retirement plan. You will have to pay current income tax on the distribution, but generally, the taxable amount will be the cost of the stock when it was added to your account. Subsequent increases in the stock’s value will not be taxed until you sell the stock. When you do sell, all or part of the increase will be taxed at the capital gains rate.
Retirement distribution planning can be complex, because it requires an understanding of the tax law, your retirement plans, and your individual needs and goals. If you plan on retiring in the near future, or even if you are already retired, speak with your tax advisor as to whether you should consider a retirement distribution checkup.
More Year-End Ideas
Adjust tax withholdings. If you have not remitted enough tax to cover your anticipated tax liability, you may be subject to underpayment penalties. These penalties are assessed based on payments throughout the year, so you may not be able to avoid the penalties by simply paying the amount due with your return. Consider increasing withholdings from your wages, because withheld taxes are considered to have been paid evenly throughout the year. Therefore, by increasing your withholdings near the end of the current year, you can avoid penalties that would otherwise have been imposed due to an underpayment of taxes earlier in the year.
Increase support to qualify for personal exemptions. Review the amount of support you have provided to your dependents. If necessary, pay additional expenses to ensure that you meet the support test that allows you to claim an exemption for dependents on your return. Each exemption you claim can reduce your taxable income by up to $4,050. (However, the amount of each personal exemption claimed is phased out at higher income levels.) In 2017, the personal exemption amount begins to phase out when AGI reaches $261,500 for single filers, $313,800 for married couples who file jointly and qualifying widow(er)s, $287,650 for taxpayers filing as head of household, and $156,900 for married filing separately.
If you are not a U.S. citizen, re-evaluate your immigration and residency status. U.S. residents are subject to U.S. federal income tax on their worldwide income, regardless of source. Generally, if you are not a U.S. citizen, you are only subject to U.S. income tax on your worldwide income if you are physically present in the U.S. for a certain number of days or if you have a U.S. green card. If you do not meet the physical presence or green card criteria, then you will be considered a nonresident for U.S. income tax purposes and will only be subject to U.S. income tax on your U.S. source income. There are ways to manage your immigration and/or residency status that could allow you to be considered a nonresident for tax purposes. Consult your tax advisor to explore your options.
