Deferring income into 2017 is a good idea if you believe that your marginal tax rate for 2017 will be equal to or less than your 2016 marginal tax rate. In addition, deferring income into 2017 could increase various credits and deductions for 2016 that would otherwise be phased out as your adjusted gross income increases.
Deferring taxable income from 2016 to 2017 may reduce your exposure to higher tax brackets if, for example:
- The deferral of income causes your 2016 taxable income to fall below the thresholds for the highest 39.6 percent tax bracket (i.e., $466,950 for joint returns; $415,050 if single); or
- You have income subject to the 3.8 percent Net Investment Income Tax (3.8 percent NIIT) and the income deferral causes your 2016 modified adjusted gross income (MAGI) to fall below the thresholds for the 3.8 percent NIIT (i.e., $250,000 for joint returns; $200,000 if single).
- Self-Employment Income: If you are self-employed and use the cash method of accounting, consider delaying year-end billings to defer income until 2017. Note that If you have already received the check in 2016, deferring the deposit does not defer the income. Furthermore, you may not want to defer billing if you believe this will increase your risk of not getting paid.
- Installment Sales: If you plan to sell appreciated property in 2016, you might be able to defer the gain until later years by taking back a promissory note instead of cash. If you qualify for installment treatment, the gain will generally be prorated over the term of the note and is taxed to you as you collect the principal payments. This is called reporting your gain on the “installment method.”
Since the “installment method” essentially allows you to spread a single gain over several years, this could cause your income in the year of sale (and possibly subsequent years) to fall below the income thresholds that kick in the top 39.6 percent rate, or the top 20 percent capital gains rate. In addition, this could also prevent your income from exceeding the thresholds for the 3.8 percent NIIT.