Once you reach age 70½, the IRS imposes required minimum distribution (RMD) rules that say you have to withdraw at least a minimum amount from your retirement plans each year or face stiff tax penalties. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your federal income tax return. Here are two suggestions to help you avoid surprises and avoid unnecessary costs.
Make a list of your accounts.The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum. However, withdrawals from different types of retirement plans can’t be combined to meet the minimum distribution threshold. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions. Failing to take distributions from each type of plan, or taking less than is required, could result in a penalty of 50% of the shortfall.
Pay attention to the date distributions must begin.The general rule says you must withdraw your RMD by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year. This can be important if your RMD will increase taxable income enough to put you in a higher tax bracket. For example, if you plan to retire on your 70th birthday, which falls in the first half of the year, and you get a substantial retirement bonus. Postponing the first withdrawal until January of the next year can help you avoid a large increase in your income during the year you turn 70.
Delaying income can be a sound tax move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes. It’s important to plan carefully and know what to expect so that you won’t be hit with a higher tax bill than you may be prepared for, whenever you decide to take your first RMD.
Contact us before year-end to discuss your retirement plan distributions. We can help you create a sound plan that keeps you in control of your tax situation.
An important part of our service to you is helping you identify actions you can take before year-end to minimize your personal 2016 federal income tax bill. Accelerating or delaying income and deductions, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. Here’s a checklist to help you get started.
Max out your 401(k) before year-end. For 2016, you can set aside $18,000 if you’re under age 50. If you’re 50 or older, you can contribute $24,000.
Get your investment planning in order. Year-end sell decisions, either to rebalance your portfolio at the lowest tax cost or to offset gains and losses, are only one aspect of investment planning. Another is keeping good records for the reinvested dividends of stocks you sell in 2016. Reinvested dividends add to your cost basis and reduce taxable gain or increase the deductible loss on the sale. Finally, consider the wash sale rule. This rule disallows a current-year loss when you purchase substantially identical securities within a 61-day period. If you plan to sell stocks to secure a loss, and intend to buy the stock back, don’t wait until the last moment.
Make gifts before year-end. The use-it-or-lose-it tax-free gifting allowance is $14,000 per donee for 2016. Remember, gifts to individuals are not tax-deductible.
Contribute to your Health Savings Account. Within limits, contributions are tax-deductible and can be used tax-free to pay unreimbursed medical expenses.
Keep an eye on the “kiddie tax.” This tax on your dependent child’s unearned income in excess of certain limits applies when your child is under age 19 (under age 24 if a full-time student).
We have more planning strategies that can save you tax dollars, depending on your individual situation. Contact us for a year-end review to make sure you’re taking advantage of all the ways you can to reduce your 2016 tax liability.
As the end of the year approaches, turn your attention to ways you can reduce your 2016 tax liability. Here are some suggestions that can add up to a lower tax burden next April:
Business equipment.Take advantage of end-of-year sales on business equipment. For 2016, a maximum Section 179 deduction of $500,000 and 50% bonus depreciation are generally available for qualified property placed in service anytime during the year. Be aware that special limits apply to vehicles.
Business trips.When you travel to wrap up year-end business deals, you can write off your expenses – including airfare, lodging and 50% of the cost of meals – if the primary motive of the trip is business-related. Costs attributable to personal side trips are nondeductible. If you travel by car, deduct actual business-related auto costs or a flat rate of 54 cents per mile (plus tolls and parking fees).
Entertainment and meals.Generally, you can deduct 50% of the cost of entertainment and meals that precede or follow a “substantial business discussion.” For example, you might treat a client to dinner and drinks after completing a contract earlier in the day. In this case, you can include 50% of the expenses for the client and yourself, as well as for spouses and significant others.
Company outings.Generally, deductions for business entertainment and meals are limited to 50% of the cost. However, if you throw a company-wide holiday party before year-end, you might be able to deduct 100% of the cost when you meet certain requirements, such as inviting your entire staff.
Hire your child.Does your teenaged child want a job to help pay for holiday gifts? If you hire your child, reasonable wages paid for actual services rendered are deductible, the same as wages of other employees. The wages will be taxable to your child at your child’s tax rate, which may be lower than your rate or that of your business.
Job credits.When your business hires workers from certain “targeted groups,” such as veterans and food stamp recipients, you may be able to claim the Work Opportunity Tax Credit. The maximum credit is generally $2,400 per qualified worker.
Depending on your situation, there may be other steps you can take now to reduce the taxes you’ll pay for 2016. Please call our office to schedule a year-end tax planning consultation.
Did you inadvertently miss the 60-day time limit for making an IRA or retirement plan rollover? You may be able to avoid taxes and possible penalties by notifying your account trustee with a “self-certification.”
When you take a distribution from your IRA or qualified plan with the intention of depositing it, or “rolling it over,” into another IRA or qualified plan, the 60-day rule says you’re required to complete the rollover within 60 days of receiving the distribution. In the past, when you missed the deadline, you generally had to request relief from the IRS. That meant paying a fee and going through a process to obtain a written statement waiving the rule.
Now, the IRS says that in some cases you can “self-certify” by submitting a written letter to your financial institution or trustee explaining why you missed the 60-day deadline. Your error must be one of eleven allowable reasons, such as death or serious illness in your family, severe damage to your principal residence, or misplacing and never cashing the distribution check.
Do you regularly monitor your company’s cash accounts? Being aware of where your cash is going can help prevent theft or improper expenditures, which are among the chief sources of loss for small companies.
What can you do to reduce the risk of losses? The textbook answer is to implement “internal controls.” Internal controls are standard procedures for assuring the integrity of your financial processes. For example, segregation of duties, such as having more than one person involved in preparing, signing, and reconciling checks, is an internal control
Utilizing internal controls and other cash monitoring strategies can minimize the chances of your business losing money unnecessarily. Here are a few suggestions for safeguarding your company’s cash:
Make sure all invoices have an approval signature before being paid.
Personally verify that new vendors exist.
Require sign-off of employee expense reports by a higher-level employee.
Don’t permit the person who prepares a company check to sign that check.
Consider requiring two signatures on checks.
Maintain a list of void checks and compare them to your bank statement.
Use a bank stamp to endorse checks immediately upon receipt.
Personally open bank statements and other mailings from the bank.
Review and reconcile your bank statement regularly.
