There are lots of year-end tax planning considerations, but only a few strategies that MUST be completed by December 31st. Here is my comprehensive list of tips that can literally save you thousands and IF you miss the deadline, you MISS the write-off!
Now, due to the breadth and scope of these strategies, I have only summarized them briefly and inserted links to more in depth articles or videos. Moreover, many of these strategies should be completed in consultation with your CPA and tailored to your situation. If you need professional support, a link to our full-service, nationwide accounting firm is at the end of the article.
Oh…yah…Happy New Year!!! Tax season is right around the corner…aren’t you excited?
1. If you implemented an HRA (Health Reimbursement Arrangement) in 2016- This is the time to process any reimbursements through your sole-proprietorship/Family Management Company or C-Corp for your fringe benefits. This is a POWERFUL tax strategy to deduct all of your ‘out of pocket’ medical expenses IF you have a small business and didn’t use a Health Savings Account (HSA). Also, if you want to implement one in 2017…sign the docs now effective 1/1/17 and make it happen. Learn more here.
2. Process payments to your family members, including your Kids or Grandchildren- This is another strategy that we have emphasized in previous newsletters and classes. Paying your children for bona-fide services they provide in your business can be a powerful tax saving tool. However, if you don’t actually show payment, you can’t claim it. Remember, you don’t have to withhold FICA or payroll taxes from payments to your kids under age 18, and you can 1099 your older children helping them create their own business…just to name a few benefits. Learn more here.
3. Purchase a car or truck- However, IF you need one and the best FOR YOU! Otherwise stated, “don’t let the tax tail wag the dog”. Now with that said, there is bonus depreciation to consider for New Cars OR Trucks, AND if you purchases an SUV or Truck with a Gross Vehicle Weight Rating (GVWR) in excess of 6,000lbs, you may be able to deduct depreciation expenses of up to $25,000. Large trucks with a 6ft or greater truck-bed can deduct up to $500,000. There are lots of options and issues to consider, learn more here.
4. Purchase any needed equipment or supplies, EVEN if with a credit card. Get the write-off now, even you pay off the credit card next year. Now…yes…there are promises of lower tax rates by our incoming new President Trump. However, hoping for a gift such as that and actually receiving it are two different things. Otherwise stated, “a bird in hand is better than two in the bush.” Consider the ‘time value of money’ and getting use of your funds now in 2017 with a lower tax bill, than a lower tax rate, whatever increment we may suppose, when it comes to paying taxes in 2018… (let that sink in for a minute).
5. Pre-pay any expenses. A little different than making year-end purchases, is considering some of your upcoming bills in January or February and making some pre-payments. This ALSO works even if you use a credit card or financing.
6. File for a ROTH Conversion- This could be the perfect time to convert your traditional IRA to a ROTH. Essentially paying taxes now at a lower rate and never have to worry about paying taxes on your withdrawals in the future. Regardless of your income, you can convert as many dollars as you want. The cool part is that as long as you make the election before December 31st, you can always ‘undo’ the election up until the filing of your tax return in 2017, under valid extension. So if you get gun shy later and/or can’t pay the tax you were expecting, check the ‘reset’ button. Read more here.
7. The Over 70 1/2 Club. For those over 70 1/2 with traditional IRAs, you are required to take required minimum distributions (“RMD”) form your account each year. The deadline for 2016 RMDs is December 31, 2016. There is a 50% excise tax penalty for failure to take RMDs. In other words, if you don’t distribute the money to yourself form your IRA in time, the IRS will just take half of it to penalize you. Those with Roth IRAs needs not worry. Roth IRAs are exempt from RMD rules. Learn more here.
8. Make a donation. This could be cash or simply a drop off of clothes or household items at Goodwill or Salvation Army. Make sure to get a receipt and check out 7 more tips here on how to maximize this write-off and audit proof the deduction.
9. Pre-pay your State Income Tax. If you know you owe state tax and haven’t made enough deposits in 2016, this is the time to do so and get a tax write-off on your federal return. A word of warning however, if you don’t itemize OR are subject to AMT (Alternative Minimum Tax), you won’t get the tax break. Talk to your CPA first before getting your hopes up and writing the check.
In Summary, you can see there is a lot to consider, so PLEASE involve your CPA or Tax Professional to assist you with any of these strategies.
If you don’t have a strategist or one you trust, please consider a consult with any of our Managers or Personal Tax Consultants (PTCs) at Kohler & Eyre CPAs. You can reach the accounting team at K&E CPAs by calling and speaking with our Client Administrator, Josie Stewart. You can reach her at 435-865-5866 or [email protected].
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.