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Top 11 Things You Need To-Do Before Year End

by Peter J. Creedon

As 2016 starts to winds down you need to do a few important things if you are a freelancer, small business owner, or earn 1099 income.

  • CPA Tax review: The first thing I recommend is 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 underfund 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.
  • 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 tomorrows 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 59 ½.
  • Company benefits: Check out all your company benefits and take advantage of them, if they are applicable. Find the person in your company (Human Resources person) that can explain the benefits or read that 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 (HAS). 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.
  • FSA: If you have a FSA, (Flexible Spending Account) be careful not to overfund the account and remember to use the funds this year (2016), 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 health care costs. An interesting fact about an FSA is the funds can be used to pay for over the counter medications, if you have a doctor’s prescription.
  • Tax loss harvesting: If you sold some investments this year for a profit, consider selling some investments that are 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 Planning: If you’re a small business, discuss your business expenses with your Tax Advisor. See if it is worth accelerating business expenses and deferring income to next year (2017). 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.
  • Required Minimum Distributions (RMD): If you are 70 ½ or older this year, or have an Inherited (Stretch) IRA, make sure you take your required minimum distribution this year (2016). IRS penalties if you miscalculate, or miss the deadlines, are 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 3 business days from the day of sale (trade date) and then time to make the distribution out of the account and sent to you.
  • Estate Plans: Review your estate plans to ensure your documents (Wills, Trusts, Health Care Proxies, Durable Powers of Attorney, and Beneficiaries) reflect current wishes. Ensure beneficiaries are current and remember to check if you want your assets (stuff) to go to beneficiaries (per Capita, surviving beneficiaries, or Per Stirpes, follow the beneficiaries family blood line if the beneficiary passes away before you. Also, if you itemize deductions check or get moving on your gifting strategies for family or charitable organizations. The annual exclusion, 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 gifting to a state 529 college saving plan.  If you own the account (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 (NY) contribution. I have seen some good stories where the grandparents are remembered as providing a great gift to a child and or allowing a grandchild to get through college and not have student loan debt, because of Grandma/Pa’s generosity. Also, other relatives, friends and corporations can open a 529 plan.
  • Business Planning: Do some tax planning for next year and get your business off to a strong start by knowing where you are and what you need to achieve to give yourself the greatest potential to accomplish your business goals.
  • Tax filing changes: The IRS (Internal Revenue Service) announced some significant changes for next year (2017). The IRS deadline for Partnership filings is now due 3/15 instead of 4/15. The reason behind the move is partnerships create K1’s and thereby allowing all those K1’s to be available for the personal and C-Corp filing deadline of 4/15. C-Corporation returns are now due 4/15 instead of 3/15 (Partnerships essentially switched due dates with C-Corps). If you have foreign, bank/investment accounts (FBARS) you need to declare the accounts by 4/15/2017 instead of 6/30/2017. For more on Tax filing date changes check out this link: http://www.thetaxadviser.com/issues/2016/aug/nex-season-due-dates-have-new-logical-order.html or you can find the changes at the IRS website, http://www.IRS.gov

Finally, 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