As 2016 starts to wind down, small businesses, freelancers and those earning 1099 income should consider these important things to accomplish.
- CPA tax review. The first thing I recommend is to schedule an appointment with your tax advisor, certified public accountant (CPA), or enrolled agent (EA) and meet by early December to review your income, expenses and taxes you expect to owe this year. The reason for the quick review is to ensure you are on track to have money and pay your estimated taxes due for 2016, and not under-fund or find out when you file your tax returns (federal, state and city if applicable) in April that you owe a large amount. Plus, you do not want to get hit with an IRS underpayment penalty on top of taxes owed.
- Check your retirement plan. If you are funding a retirement plan such as a 401(k) or 403(b), make sure you are contributing to the plan. The maximum employee contributions for 2016 is $18,000 if you are under 50 years old. If you are over 50, you can contribute an additional $6,000 for a maximum employee contribution of $24,000 in 2016. Make sure you balance out lifestyle expenses with tomorrow's retirement goals so you do not have to borrow or withdraw funds from your retirement plan, since withdrawals are normally taxed as ordinary income plus a 10% early withdrawal penalty if funds are distributed to you before age 59.5. (For related reading, see: Don't Wait to Pay Attention to Your Finances.)
- Zero in on company benefits. Check out all your company benefits and take advantage of them, if they are applicable. Find the person in your company (in the human resources department, if you have one) that can explain the benefits or read the employee benefit plan booklet they gave you. You could be giving away many important and helpful benefits, such as educational reimbursement, a flexible spending account (FSA), or health savings account (HSA). The HSA allows you to pay health expenses, deductibles, or co-pays with pre-tax dollars. This means if you pay a $100 medical bill from your HSA, you are saving the taxes you would have paid if you paid the bill from your take-home pay/paycheck.
- Watch your FSA. If you have a FSA, be careful not to overfund the account and remember to use the funds this year, since most plans do not allow balances to rollover to the next year. There are some exceptions to rollover balances, but these are very limited and not all employers offer them. It's important to plan carefully and not put more money in your FSA than you think you'll spend within a year on items like co-payments, co-insurance, drugs, and other allowed healthcare costs. An interesting fact about an FSA is the funds can be used to pay for over-the-counter medications, if you have a prescription.
- Try tax loss harvesting. If you sold some investments this year for a profit, consider selling some that came in at a loss in order to offset your gains (tax loss harvesting). Also, while you are discussing year-end planning with your tax advisor or CPA, discuss if it is worth converting some of your IRA funds to a Roth IRA, particularly if you are eligible and have time to benefit from the compounding effect of time.
- Business plan. If you’re a small business, discuss your business expenses with your advisor. See if it is worth accelerating business expenses and deferring income to next year. Most small businesses operate on a cash basis and book income when it is received and expenses when paid, so there is some room to plan. (For related reading, see: Are You ERISA Compliant? Follow This Checklist.)
- Those required minimum distributions (RMDs). If you are 70.5 or older this year, or have an Inherited (Stretch) IRA, make sure you take your required minimum distribution this year. The IRS hits you with a penalty if you miscalculate or miss the deadline and it can be pretty severe, so give yourself enough time to deal with this area—calmly. If you have to sell out of a position to free up cash, allow time for a trade to settle, usually three business days from the day of sale (trade date). Also take time to take the distribution out of the account and have it sent to you.
- Check estate plans. Review your estate plans to ensure your documents (wills, trusts, healthcare proxies, durable powers of attorney, and beneficiaries) reflect current wishes. Ensure that your beneficiaries are current and remember to check if you want your assets to go to beneficiaries per capita to surviving beneficiaries, or per stirpes where the assets follow the beneficiaries family blood line if the beneficiary passes away before you. Also, if you itemize deductions, get moving on your gifting strategies for family or charitable organizations. The annual exclusion, or money you can give a person, is $14,000 in 2016. If you are married you can gift your child $28,000 ($14,000 from you and your spouse) with no tax ramifications to you or your child. If you have grandchildren, consider setting up a state 529 college saving plan. If you own the account (like a parent or grandparent), you can potentially get a state tax credit on the state tax that would be assessed on your contribution with up to $10,000 contribution. I have heard some good stories about grandparents who are remembered as providing a great gift to a child and/or allowing a grandchild to get through college without having student loan debt. Also, other relatives, friends and corporations can open a 529 plan for someone.
- Tax filing changes: The IRS announced some significant changes for 2017. Its deadline for partnership filings is now due March 15 instead of April 15. The reason behind the move is that partnerships create K-1s; this allows all these K-1s to be available for the personal and C-corp filing deadline of April 15. C-corp returns are now due April 15 instead of March 15. (Partnerships essentially switched due dates with C-Corps.) And if you have foreign bank/investment accounts (FBARS), you need to declare the accounts by April 15, 2017, instead of June 30, 2017.
Lastly, meet with your certified financial planner (CFP) to review and update your financial plan to ensure your investment portfolio is rebalanced and reflects your current risk tolerance, your financial planning goals and values. (For related reading, see: 11 Financial Steps to Take Before the Holidays.)