Are you looking to end your personal and business financial year on a high note? You’re in luck because there’s still time to make a few last minute financial moves before the ball drops on New Year’s Eve. And even a few that you can take advantage of in 2017 for the 2016 tax year. Some of these moves will save you some money on your 2016 tax bill while others will set you up for a more profitable new year.
Max out 401(k) contributions
If your employer offers a 401(k) plan, there’s still one paycheck left in the year to max out or contribute juuuust a little more to your 401(k) as an employee. So if your budget can swing it, log in to your 401(k) account and bump up your contribution through the end of the year. For 2016, you can contribute up to $18,000 or $24,000 if you’re 50 or older.
Entrepreneurs also have time to contribute to a retirement account
Solo business owners (or a business owner with a family member as their business partner) have until the end of the business tax year to establish a Solo 401(k). They then have until their tax filing deadline (plus extensions) to make any contributions:
- Elective deferrals of up to 100% of earned income up to a maximum annual contribution of $18,000 in 2016, or $24,000 in 2016 if age 50 or over; plus
- Employer non-elective contributions up to 25% of compensation, with total contributions not to exceed $53,000 for 2015 and 2016.
Note that these elective deferral limits apply per person, not per plan. So if you’re also participating in another employer’s 401(k), say if you’re starting your business while still employed at a corporate job and making 401(k) contributions to take advantage of an employer match, these will count against the limit for employee contributions to an individual 401(k) or SIMPLE IRA.
As for SEP IRA’s, business owners have until their tax filing to establish and make a contribution to that type of retirement account. A SEP IRA is like a traditional IRA, but it is funded solely by employer contributions. A business owner sets up an IRA for each qualifying employee and can contribute up to 25% of each employee’s pay (and 25% of net self-employment income). Annual contributions are limited to the smaller of $53,000 or 25% of compensation for 2015 and 2016. There are no “catch-up” contributions like the solo 401(k). The SEP IRA is a great option for those who do not qualify for a solo 401(k), or who have employees and are looking for a retirement plan for their company.
If you need help setting up a retirement account, Brightwater Financial is here for you.
Max out Traditional or Roth IRA contributions
Another way an individual with earned income can start saving for retirement is by contributing to a Traditional or Roth IRA. And this is regardless of whether it’s from self-employment or traditional employment. You have until April 15, 2017 to make a contribution for the 2016 tax year. For 2016, individuals can contribute up to $5,500 ($6,500 if you’re age 50 or older) or their taxable compensation for the year, if their compensation was less than this dollar limit. However, a Roth IRA contribution might be limited based on tax filing status and income.
Roth IRAs are great because you can withdraw your money tax-free when you’re in retirement. Or you may want to contribute to a traditional IRA and get an income tax deduction. However, that deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Review the IRS guidelines for more details.
Convert a Traditional IRA to a Roth IRA
If you’re in a lower tax bracket now than what you expect in the future (i.e. you were unemployed for part of the year or started a business this year and expect income to grow next year), it might be a good time to convert an old 401(k) or traditional IRA into a Roth. That means you can capture lower taxes today and withdraw that money from your Roth tax-free when you’re in retirement. Make sure the amount you convert keeps you in a low tax bracket.
If it turns out that your income didn’t change the way you expected in the following year, you can reverse a Roth IRA conversion, also know as recharacterization. The recharacterization needs to be completed by the last date, including extensions, for filing or refiling your prior-year tax return, which is typically on or about October 15. You can generally recharacterize all or a portion of what you converted.
Take required minimum distributions
This isn’t usually an issue for my client base since required minimum distributions apply to folks over 70 1/2 with employer retirement plans (if you’re retired) and traditional IRA’s. But this may apply to you if you inherited a retirement plan as a non-spouse beneficiary. The annual deadline to take required minimum distributions is December 31. Make sure you get this done because the penalty is 50% of the required minimum distribution.
Sign up for a class from an accredited school
The lifetime learning credit can cut your tax bill by up to $2,000 a year (20% of tuition up to $10,000), depending on your income. This credit is available for all years of postsecondary education and for courses to acquire or improve job skills. To claim the credit for 2016, you need to register and pay for the class by the end of the year and start the class by March 31, 2017.
And while continuing education by an accredited school to maintain a professional license is eligible, if you’re self-employed, you might be better off claiming your education expense as a business deduction.
Unfortunately, couples filing as married filing separate are not eligible to take the credit. Same for couples filing jointly with modified adjusted gross income of $130,000 or more or individuals filing as single, head of household, or qualifying widow(er) with modified adjusted gross income of $65,000 or more.
Take advantage of tax loss harvesting
If you sold some investments at a gain during the year, you can offset this by selling other poorly performing investments at a loss. As explained by the IRS, “Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.”
If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your ordinary income is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss shown on Schedule D. If your net capital loss is more than this limit, you can carry the loss forward to later years.
And while you’re reviewing your investments, take a moment to review your current asset allocation and rebalance them to match your target allocation.
Spend your FSA dollars
If you’ve contributed to a flexible spending account through your employer benefit, make sure you spend those dollars by the end of the year. While some plans have a grace period and may let you carry over some money into 2017, others are “use it or lose it.” Here’s a great listing of eligible healthcare FSA expenses.
Accelerate next year’s tax deductions
If you had unusually high income in 2016 (maybe you won the lottery, earned a large bonus, or sold a business), consider accelerating some of next year’s deductions: prepay your January mortgage payment for the mortgage interest deduction, property taxes, professional dues or subscriptions.
And while some business owners might make some last minute business purchases like booking flights, hotels, or conference tickets it’s not a dollar for dollar benefit on their ending tax bill. Though if you plan on purchasing some new equipment before year end, you could be eligible to accelerate depreciation expense on your business tax return. So make wise decisions and check with your CPA (like me!) when it comes to these additional business expenses.
Donate to your favorite charity
Parts of the tax code are designed to encourage certain behaviors. Deducting charitable contributions on your tax returns is just one example. If you’re feeling particularly generous (and yes, want to lower your taxable income), you have until December 31 to make a donation to your favorite eligible charity.
Contribute to a college savings fund
If you’ve maxed out your retirement savings for the year and want to save for your child’s college education, there’s still time to contribute to a 529 plan. You won’t get a benefit on your federal tax return, but there are tax benefits for some states. Individuals can contribute up to $14,000 ($28,000 for married couples) per student each year, or up to $70,000 ($140,000 for married couples) prorated over a five-year period to someone’s existing account, without incurring a federal gift tax.
Reflect on your finances and get ready for next year
This is also a great time to make personal and business goals for the upcoming year. Do you need to update your pricing? Do you need to revise your product offerings? Or maybe you’d rather focus on your business and want to outsource bookkeeping or CFO-type services. That’s where I can step in and help!
If you want to discuss any of these year end financial moves, there’s still time to schedule a 30 minute strategy session with me.
And if you’re looking for assistance with your taxes or small business accounting, Brightwater Accounting is currently taking new clients.