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
$108,000 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
$1,000 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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