Contributions limit to 401(k) plans continue to increase. For 2015, the maximum employee contribution is $18,000. Added benefit: For those taxpayers who are age 50 or older the catch-up contribution is $6,000 for a maximum total employee contribution of $24,000.
Declare dividends. Qualified dividend income received during the tax year from a domestic corporation is generally taxed at 15% and as high as 23.8% for wealthy taxpayers in the top income tax bracket and as low as 0% for taxpayers in the lower tax brackets.
This makes it attractive for business owners to distribute cash through dividends, even more so for business owners and family shareholders who are in a low tax bracket and especially for those who are in the 0% tax bracket.
It is common for many businesses to not pay dividends in past years when dividends were taxed at high ordinary income tax rates. You should consider it now.
Additional opportunity: Gift shares of stock to family members who are in a low tax bracket before declaring a dividend, as part of a larger plan to shift ownership of the business to younger family members.
The owners of pass-through entities, such as S corporations and partnerships, have the income taxed on their personal tax returns. The key is too…
Have sufficient basis to deduct losses. The loss of pass-thru entity are deductible only to the extent the owner has basis in the entity. Basis is created by investing in the entity or making a loan to it.
If you are planning this year to deduct your losses check to see if your basis is adequate to absorb your losses. If it’s determine your basis is not adequate to deduct the losses you can correct the situation by making a loan to your company by year-end.
Adjust personal tax payments to pay business taxes. The tax on business income from a pass-through entity must be paid by the owner either through estimated tax payments or payroll withholdings. It is important for business owners to estimate how much income they will be receiving from the business in order not to be subject to penalties and interest charges for underpayment of their taxes.
You can avoid penalties and interest charges by having more taxes withheld from your wages before year-end. Taxes withheld from wages is treated as if it had been evenly withheld throughout the year.
Write down inventory. If your company has inventory that has declined in value you can deduct the decline in value. For example: Document a reduced market value for the inventory by making a bona fide offer to sell some of it at a lowered price within 30 days of year-end.
Set up deductible retirement accounts. Most company retirement plans, including 401(k) plans, must be set up by December 31 to receive deductible contributions for 2014. Other kinds of plans can be set up after year-end, but make your choice among all possible options before then.
Bad debts. These become deductible only when they lose all their value and by companies who use the accrual basis accounting. Review your accounts receivable for uncollectible accounts.
Save with a flexible spending account (FSA). Allows employees to pay for health care expenses, dependent care expenses, and work related parking and travel costs with pretax dollars saved from pay into a tax-favored spending account. The business owner saves employment taxes on these amounts and at the same time receives more from its compensation dollars by providing a tax-favored benefit.
If you want to keep your 2016 taxes as low as possible, the best way to do it is to develop a tax plan early in the year. Here’s how to do it.
Contribute to your 401(k) plan. For 2016, you can contribute up to $18,000.