The roar of the Sturgis Rally motorcycles has turned into a distant hum and the summer tourism is slowing down in the Black Hills; now is a great time to start working on tax planning and strategies for 2017. To get started you should consider some things first. Are your business books updated and reconciled? Do you have a list, folders or a file on your computer of paperwork for your 2017 tax return? By having these items available we can help set and achieve future tax goals. Everyone would like to save some money, right?
Why is proper tax planning so important to achieve future goals.
- Reduce the current year’s tax liability or deferral to future years.
- Reduce any potential future years’ tax liabilities.
- Maximize the tax savings from allowable deductions.
- Minimize capital gain.
- Avoid penalties for underpayment of estimated taxes.
- Increase availability of cash for investment, business or personal needs by deferring your tax liability.
- Manage your cash flow by projecting when tax payments will be required.
- Maximize the amount of wealth that stays in your family.
- Maximize the amount of money you will have available to fund your children’s education as well as your retirement.
Here are some of the ways to achieve these goals.
- Employee deferrals to 401(k), 403(b), qualified 457and other qualified plans remain unchanged in 2017 at $18,000, with a 50 and older catch–up of $6,000.
- Traditional and Roth IRA limits remain at $5,500 with a $1,000 catch-up and SIMPLE IRAs remain at $12,500 with a $3,000 catch-up subject to phase out amounts. SEP IRAs increased to $54,000 (from $53,000 in 2016).
Making required minimum distributions
Individuals age 70 ½ or older who have a traditional IRA or other qualified retirement plans are subject to Required Minimum Distributions (RMDs). Individuals who do not take the appropriate RMD from their qualified plans may be assessed a penalty of 50% of the distribution amount that was not taken. If you are considering converting an IRA to a Roth IRA, it is important to take your RMD before converting.
W-2 Federal Withholding
When you withhold too much federal withholding from your paycheck you are giving Uncle Sam an interest-free loan on your money. Some reasons to change your W-4 withholding could be your spouse changes or gets a job, you were unemployed part of the year, you get a second job, you get married, get divorced, have a baby or adopt.
Sale of Investments Over Multiple Years
“Fill Up” The 15% Bracket: Consider taking advantage of the 0% long-term capital gains rate (for those within the 15% marginal tax bracket) by realizing enough gains to “fill up” the 15% bracket and spreading the sale of investments over multiple years. This could save you from realizing all of your gains in one year and paying 15% – 23.8% in taxes.
Income Deferrals and Deductions
Determine if income deferral or deductions/credit acceleration could be beneficial in the future or will help reduce your tax bill. When considering whether to accelerate or defer items of income, some of the following strategies could be beneficial.
- Hold off sending billings and collections in 2017 (if you are using the cash basis of accounting)
- Receive bonuses earned for 2017 in 2018 (for cash basis taxpayers only)
- Sell appreciated assets in 2018
- Delay Roth conversions to 2018
- Minimize retirement distributions
- Execute like-kind exchange transactions
- Bunch itemized deductions into 2017
- Accelerate bill payments into 2017 (for cash basis taxpayers only)
- Pay 2017 property taxes in 2017 instead of 2018
- Contribute to a Retirement Plan
- Accelerate charitable giving
Business Equipment Depreciation
The amount allowable under the direct write off Section 179 election for items placed in service between January 1, 2017 and December 31, 2017 is $510,000 if total property placed in service does not exceed $2,010,000. The 50% bonus depreciation is available for 2017 on new equipment and on Qualified Improvement Property, however, 50% bonus depreciation is no longer available on Qualified Leasehold Improvements.
Estate tax exemption
Individuals are each entitled to an estate tax exemption of $5,490,000 for 2017 which can be used after their deaths to protect that amount from estate tax. If a decedent leaves all property to their spouse, there may be no estate tax (due to the marital deduction).
A child employed by his or her parents in a trade or business under the age of 18 is not subject to Social Security and Medicare taxes if the business is a sole proprietorship, LLC or partnership. Are you interested in finding out about tax planning specific to your needs? If you are please contact Ketel Thorstenson for further assistance or guidance.