year end tax planning

Year End Tax Planning

Year end tax planning, yup, about the last thing we want to be thinking about right now. It’s the holidays! Here are 11 reasons you should devote some time this month to thinking about tax planning before ringing in the new year.

Things you can do to lower your personal taxes:

Start a retirement plan

It’s not too late to fund your retirement account. Putting aside anything, even if it’s a small amount will help build your nest egg for retirement. The contributions you make lower your taxable gross income dollar for dollar so it’s a great idea for lowering your tax liability.

If you are starting a Solo 401(k) plan or fund your 401(k) through your corporation you must do so by December 31, 2016

Invest in an IRA

Traditional, Roth and SEP-IRA contributions must be made by April 15, 2016. However, if you are planning to get an extension on filing your return, contributions must be made before the extension filing deadline.

Visit the doctor

To deduct medical expenses, you must spend more than 7.5 percent of your adjusted gross income. If you’ve had a lot of medical expenses this year, review your receipts and see if you’re close to the 7.5 percent threshold you’d have to reach to be able to deduct those costs. If you need a few more medical expenses, visit the doctor (or the dentist, or the optometrist) or fill prescriptions before the year ends.

Donate to charity

If you plan to donate money or goods to charity, do it before the end of the year. The deduction will reduce your taxable income.

Review your portfolio

Consider selling off losing investments before the end of the year. The loss can help offset the profit on some of your winning investments.

Capital losses can be taken against other capital gains. Annual capital losses are capped at $3,000 per year. If losses exceed $3,000, they carry over to future tax years to offset other gains.

Before you make a move, consult with your tax preparer or strategist to make sure you are making the right move for your long-term tax strategy.

Things you can do in your business to reduce your tax liability:

Defer income

In this economy, most of us try to get paid asap. However, if your taxable income is high for this year, you may want to defer payments until the new year. By deferring income until next year, your tax burden will be reduced for the current year.

Buy, Buy, Buy

Increasing expenses, such as paying off bills or other debts or paying out bonuses to employees, will help increase your deductions. If you’ve been delaying major purchases for your business, now is a great time to buy. Not only can you find great deals as businesses try to clear out inventory, you’ll have more deductions.

W-2 Yourself

If you are making money in your company and have not already starting paying yourself a W-2 salary, now is a good time to plan for payroll for next year.

If you already have yourself on payroll, this is a good time revisit your salary. Make adjustments, increase or lower it, based on your income so far this year.

Prepare now for new home purchase or re-fi

Savvy entrepreneurs use the tax code to legally pay as little tax as possible. The tax code is there for that very reason, however, a very common challenge for the entrepreneur is qualifying for a mortgage or a loan.

I remember fondly the days pre-2008 when you could easily (some might say too easily) get a loan. Oh the good old days. Today, regardless of how well your business is doing, or the strength of your credit score, banks are exceedingly stringent on lending. They want to see income, the very thing we entrepreneurs strive to minimize.

If you know you are going to need a mortgage, refinance your house or need any kind of conventional loan, consider increasing your W2 payroll contribution for the current year. Yes, you will have to pay payroll taxes on the increased amount but you may find the increase in taxes this year is worth it if it means getting the loan you want next year.

Hire your kids

Put your kids on the payroll. Instead of giving your kids money or an allowance, pay them for bona-fide work they do for your business. Cleaning the office, filing, data entry, computer work are all great jobs for the kids.
It’s important that you create a job description for the work they will do. Create a separate bank account, document the work they do and pay them through the company.

In an article for Forbes, according to Alex Mandossian, the Larry King of Google Hangouts, “There’s very little division remaining between our personal and professional lives. Why not go a step further and make it Dad’s and Mom’s responsibility to launch the family business from home? Children would learn the skills to take responsibility for their own financial futures. “Instead of paying your child an allowance, why not give them a paycheck?” Alex says.

Plan to incorporate in the new year

January 1 is a perfect time to establish your corporation. It is also a great time to start setting up your separate accounting books and bank account if you haven’t already. A number of states impose franchise taxes and fees that make it most economical to file articles in the new year.

Starting the year off clean with separate books and bank accounts will make organizing your business and personal life much easier throughout the new year.

Aaron Young, CEO of corporate solutions service and education provider Laughlin Associates, of Reno, Nevada has some advice for small companies as they approach year end: “For as much negative as we hear about taxes, the fact is that the government has actually given amazing incentives to people with enough courage to become entrepreneurs. Small business owners who don’t take time to learn about the tax code are leaving money on the table. Don’t think that tax breaks are only for the big guys. Many of the same deductions they use can benefit small businesses and even solo-preneurs.”

What steps will you take in the coming weeks to plan for a successful end to a great year?


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