retirement

Article Dean Dorton

With most of 2016 behind us, you may want to consider some year-end tax-saving ideas. Before acting on these, note the following:

  • Most strategies do not apply universally, but only in specific circumstances.
  • Many strategies should take into account not just the current year’s impact, but future years’ projected impacts as well.
  • Strategies that reduce your current year regular federal income tax may not reduce your overall federal income tax due to the alternative minimum tax.

Section 179 and bonus depreciation — Businesses should consider these tax breaks related to fixed asset acquisitions:

  • Section 179 depreciation deduction. In 2016, individuals and business entities can elect to deduct up to $500,000 of qualifying business property cost in the year the property is placed-in-service. The deduction is reduced dollar-for-dollar for qualifying property cost greater than $2,000,000. Note that this deduction is available only to the extent of positive business taxable income.
  • Special “bonus depreciation” allowance. For 2016, an additional depreciation deduction is permitted for qualifying property in the year it is placed in service. This bonus depreciation is a deduction of 50% of the qualifying property’s cost.

Capital gains and losses — If you have realized net capital gains during 2016, consider realizing capital losses before the end of the year to offset the gains. Remember that net long-term losses can be used to offset net short-term capital gains which otherwise would be taxed at ordinary rates. Also, be aware of the “wash sale” rules if you are inclined to reinvest in a security you sell at a loss.

Self-employed retirement plans — If you have self-employment income and don’t have a retirement plan in place to shelter any of it, you may qualify to use a Self-Employed Plan (SEP). A SEP contribution deduction is allowed for 2016, even if the SEP is created and funded at any time up to the due date, including extensions, of the 2016 income tax return in 2017.

Charitable contributions — Consider funding charitable gifts with appreciated marketable securities held for more than one year, resulting in gains being untaxed and deductions being allowable at the securities’ market values. You may also charge charitable contributions on your credit card; contributions posted to your account before year-end are deductible this year, even if you do not pay the charges until next year.

Annual gifting — You may give your children and others up to $14,000 each in 2016 without any gift tax consequences. This annual exclusion is calculated on a per donee basis and no carryover is allowed for the unused exclusion. Consider making year-end gifts to fully utilize this year’s annual exclusion, and consider making your 2017 annual exclusion gifts (also at $14,000 per donee) early next year.

Required minimum distributions — Individuals with retirement plan accounts (employer qualified plans or IRAs) generally are required to take minimum annual distributions upon reaching age 70 ½. Steep penalties apply to noncompliance, and not all IRA custodians or plan sponsors actively communicate the applicability of the rules to account holders and plan participants.

S Corporation and partnership losses — If your S Corporation will generate a tax loss this year, consider whether you have enough basis in the stock (or in loans you’ve made to the corporation) to take the full loss. If you don’t, additional investments should be considered. Similar considerations can arise in some situations with partnerships expecting tax losses.

Possible elimination or reduction of valuation discounts for family-owned businesses — As reported in an earlier newsletter, the U.S. Treasury has proposed regulations which, if finalized, will have the effect of increasing valuations of noncontrolling interests in family-owned businesses and investment entities for gift, estate, and generation-skipping tax purposes. The proposals are attracting much criticism. A hearing on the proposals is scheduled for December 1. Subsequent courses of action include at least the following:

  • The regulations being finalized as proposed
  • The regulations being finalized with modifications
  • Withdrawal of the proposals followed by further study

Once finalized, the regulations would become law after 30 days. If you are interested in transferring an interest in a family-owned entity, you may want to consider conducting such transactions before the end of the year.

If you have any questions, contact your Dean Dorton advisor or Matt Smith at msmith@deandortonstg.wpenginepowered.com.

Article Dean Dorton

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

  1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
  2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
  3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Contact us if you want more information about setting up the best retirement plan in your situation.

Article Dean Dorton

There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:

  1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.
  2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.
  3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.

If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.

Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.

There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.

Article Dean Dorton

It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.

For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.

If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.

What happens if qualified status is lost?

Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.

In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.

Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).

Voluntary corrections

The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.

Article Dean Dorton

Tax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth IRA accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible. Have you maxed out your 2015 limits?

April 18 deadline

While it’s too late to add to your 2015 401(k) contributions, there’s still time to make 2015 IRA contributions. The deadline is April 18, 2016. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2015).

A traditional IRA contribution also might provide some savings on your 2015 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2015 tax return.

Evaluate your options

If you don’t qualify for a deductible traditional IRA contribution, see if you qualify to make a Roth IRA contribution. If you exceed the applicable income-based limits, a nondeductible traditional IRA contribution may even make sense. Neither of these options will reduce your 2015 tax liability, but they still provide valuable opportunities for tax-deferred or tax-free growth.

We can help you determine which type of contributions you’re eligible for and what makes sense for you.