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1. Consider establishing an employee stock ownership
plan (ESOP).
If you own a business and need to diversify your investment portfolio,
consider establishing an ESOP. A properly funded ESOP provides you with a
mechanism for selling your shares with no current tax liability. Consult a
specialist in this area to learn about additional benefits.
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2. Make a succession plan.
Have you provided for a succession plan for both management and
ownership of your business in the event of your death or incapacity? Many
business owners wait too long to recognize all the benefits from making a
succession plan. These benefits include ensuring an orderly transition and
ensuring the lowest possible tax cost. Waiting too long can be expensive
from a financial perspective (covering gift and income taxes, life insurance
premiums, appraiser fees, and legal and accounting fees) and a non-financial
perspective (intrafamily and intracompany squabbles).
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3. Consider the limited liability company (LLC) and
limited liability partnership (LLP) forms of ownership.
These entity forms should be considered for both tax and non-tax reasons.
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4. Avoid nondeductible compensation.
Compensation can only be deducted if it is reasonable. Recent court
decisions have allowed business owners to deduct compensation when (1) the
corporation’s success was due to the shareholder–employee, (2) the bonus
policy was consistent, and (3) the corporation did not provide unusual
corporate prerequisites and fringe benefits.
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5. Purchase Corporate Owned Life Insurance (COLI).
COLI can be a tax-effective tool for funding deferred executive
compensation, funding company redemption of stock as part of a succession
plan, and providing many employees with life insurance in a highly leveraged
program. Consult your insurance and tax advisers when considering this
technique.
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6. Consider establishing a SIMPLE retirement plan.
If you have no more than 100 employees and no other qualified plan, you
may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which
an employee may contribute up to $10,000 per year if you're under 50 years
old and $12,500 a year if you're over 50. You, as employer, are required to
make matching contributions. Talk with a benefits specialist to fully
understand the rules and advantages and disadvantages of these accounts.
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7. Establish a Keogh retirement plan before December
31st.
If you are self-employed and want to deduct contributions to a new Keogh
retirement plan for this tax year, you must establish the plan by December
31st. You don’t actually have to put the money into your Keogh(s) until the
due date of your tax return. Consult with a specialist in this area to
ensure that you establish the Keogh or Keoghs that maximize your flexibility
and your annual contributions.
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8. Take advantage of section 179 expensing.
If you meet certain requirements, you may be able to expense up to
$105,000 in purchases of qualifying property placed in service during the
filing year, instead of depreciating the expenditures over a longer time
period.
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9. Don’t forget deductions for health insurance
premiums.
If you are self-employed (or are a partner or a 2-percent S corporation
shareholder–employee), you may deduct 100% of your medical insurance
premiums for yourself and your family as an adjustment to gross income. The
adjustment does not reduce net earnings subject to self-employment taxes,
and it cannot exceed the earned income from the business under which the
plan was established. You may not deduct premiums paid during a calendar
month in which you or your spouse is eligible for employer-paid health
benefits.
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10. Review whether compensation may be subject to
self-employment taxes.
If you are a sole proprietor, an active partner in a partnership, or a
manager in a limited liability company, the net earned income you receive
from the entity may be subject to self-employment taxes.
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11. Don’t overlook minimum distributions at age 70½ and
rack up a 50 percent penalty.
Minimum distributions from qualified retirement plans and IRAs must
begin by April 1 of the year after the year in which you reach age 70½. The
amount of the minimum distribution is calculated based on your life
expectancy or the joint and last survivor life expectancy of you and your
designated beneficiary. If the amount distributed is less than the minimum
required amount, an excise tax equal to 50 percent of the amount of the
shortfall is imposed.
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12. Don’t double up your first minimum distributions and
pay unnecessary income and excise taxes.
Minimum distributions are generally required at age seventy and
one-half, but you are allowed to delay the first distribution until April 1
of the year following the year you reach age seventy and one-half. In
subsequent years, the required distribution must be made by the end of the
calendar year. This creates the potential to double up in distributions in
the year after you reach age 70½. This double-up may push you into higher
tax rates than normal. In many cases, this pitfall can be avoided by simply
taking the first distribution in the year in which you reach age 70½.
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13. Don’t forget filing requirements for household
employees.
Employers of household employees must withhold and pay social security
taxes annually if they paid a domestic employee more than $1,400 a year.
Federal employment taxes for household employees are reported on your
individual income tax return (Form 1040, Schedule H). To avoid underpayment
of estimated tax penalties, employers will be required to pay these taxes
for domestic employees by increasing their own wage withholding or quarterly
estimated tax payments. Although the federal filing is now required
annually, many states still have quarterly filing requirements.
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14. Consider funding a nondeductible regular or Roth
IRA.
Although nondeductible IRAs are not as advantageous as deductible IRAs,
you still receive the benefits of tax-deferred income. Note, the income
thresholds to qualify for making deductible IRA contributions, even if you
or your spouse is an active participant in a employer plan, are increasing.
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15. Calculate your tax liability as if filing jointly
and separately.
In certain situations, filing separately may save money for a married
couple. If you or your spouse is in a lower tax bracket or if one of you has
large itemized deductions, filing separately may lower your total taxes.
Filing separately may also lower the phaseout of itemized deductions and
personal exemptions, which are based on adjusted gross income. When choosing
your filing status, you should also factor in the state tax implications.
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16. Avoid the hobby loss rules.
If you choose self-employment over a second job to earn additional
income, avoid the hobby loss rules if you incur a loss. The IRS looks at a
number of tests, not just the elements of personal pleasure or recreation
involved in the activity.
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17. Review post-death planning opportunities.
A number of tax planning strategies can be implemented soon after death.
Some of these, such as disclaimers, must be implemented within a certain
period of time after death. A number of special elections are also available
on a decedent’s final individual income tax return.
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18. Check to see if you qualify for the Child Tax
Credit.
A $1,600 tax credit is available for each dependent child (including
stepchildren and eligible foster children) under the age of 17 at the end of
the taxable year. The child credit generally is available only to the extent
of a taxpayer’s regular income tax liability. However, for a taxpayer with
three or more children, this limitation is increased by the excess of Social
Security taxes paid over the sum of other nonrefundable credits and any
earned income tax credit allowed to the taxpayer.
For more information concerning these financial
planning ideas, please call or email us.
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