Contributing to a Retirement Plan Can Save You Money

Reduce your taxable income while building a nest egg

Investing the maximum allowable contribution per year to a retirement account is a great way to reduce your taxable income. Below, are several types of accounts that are available to taxpayers.

Traditional 401(k) Plans

401(k) plans are a common way for businesses to help employees save for retirement. Traditional 401(k) contributions are not considered taxable income, so investing in a 401(k) is a great way to invest in your retirement while also cutting your taxable income for the year. Amounts invested in this type of account are not taxed until they are distributed.

If your employer matches your 401(k) contributions, you may want to consider investing the maximum amount allowed for 2017, which is $18,000 for those under the age of 50 and $24,000 for those 50 and over. Keep in mind, these amounts are per individual. There is no such thing as a spousal 401(k).

Roth 401(k) Plans

If your employer allows you to put some or all of your 401(k) contribution in a Roth 401(k) account, you may want to consider doing so. Although there is no tax deferral with this type of contribution, it does grow tax free. Generally, distributions from a Roth 401(k) plan are not taxed. The contribution limits for a Roth 401(k) are the same as the limits for a traditional 401(k).

Traditional IRA Plans

Contributions made to a traditional IRA may be fully or partially deductible. Generally, amounts in your traditional IRA, including earnings and gains, are not taxed until distributed. If you’d like to potentially reduce your taxable income through this type of account, the contribution limits for 2017 are $5,500 if you are under age 50 and $6,500 if you are age 50 or older.

Roth IRA Plans

A Roth IRA is an IRA that is mostly subject to the same rules that apply to a traditional IRA. The main difference is that you cannot deduct contributions to a Roth IRA. The same yearly contribution limit applies to all of your Roth and traditional IRAs, but note that your Roth IRA contribution might be limited based on your filing status and income. The contribution limits for a Roth IRA account for 2017 are the same as the limits for a traditional IRA.

If you need help determining which account is right for you, we would be happy to assist you.

Other Tax-Saving Options

There are many ways to save

Like retirement plans, there are additional education and healthcare related plans that may help you lower your taxable income.

529 Education Savings Plans

529 plans are operated by a state or educational institution and offer tax advantages and potential incentives. These plans make it easier to save for college for a designated beneficiary, such as a child or grandchild. When used for qualified education expenses, earnings are not subject to federal tax and are generally not subject to state tax. Your contributions are limited to the amount necessary to provide for the qualified education expenses of the beneficiary. This will be different based on the circumstances of your family. Be aware, though, that contributions to 529 plans are considered gifts. If you give more than $14,000 to any one beneficiary, you may have to file a gift tax return.

Health Savings Accounts (HSAs)

Is your health insurance a High Deductible Health Plan (HDHP)? If so, you are likely able to contribute to an HSA. An HSA is a tax-exempt trust or custodial account that is set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. There are several tax benefits to contributing to this type of plan. For example, you can claim a tax deduction for contributions you or someone other than your employer make to your HSA, even if you don’t itemize your deductions. Additionally, con­tributions to your HSA made by your employer may be excluded from your gross income. The account grows tax free, and distributions for qualified medical expenses are exempt from income taxes as well.

There are certain qualifications you must meet to open one of these accounts, as well as yearly contribution limits.

There Are Countless Ways to Save!

Making contributions to the accounts above are just a few ways to lower your taxable income. Other methods that may potentially lower the income that’s reported on your return include giving to a charity, paying your property tax bill early and making energy-efficient upgrades to your house. If you need help in determining the best way to reduce your income, I’m more than happy to help!

Reimbursing Employees for Business Expenses

What you need to know about accountable and nonaccountable plans

If you have employees, you can reimburse or give them an advance or allowance for business expenses, including but not limited to ordinary and necessary transportation, business entertainment, travel, meals and lodging expenses. These types of payments can either be treated under an accountable or nonaccountable plan. Below, are the requirements for both types of plans.

Accountable Plans

An accountable plan requires your employees to comply with the following requirements:

•     Pay or incur deductible expenses while performing services as your employee;

•     Adequately account to you for these expenses within a reasonable period of time; and

•     Return any excess reimbursement or allowance within a reasonable period of time.

You are allowed to deduct expense reimbursements to employees who properly comply with the terms of the plan as business expenses (limited to 50% for meals and entertainment). These reimbursements are excluded from the employee’s gross income, are not reported as wages or other compensation on the employee’s Form W-2, and are exempt from federal income tax withholding and employment taxes.

Amount Deductible for M&E is 50% of:

Expense

Lesser of per diem allowance or federal rate
 
Federal rate
 

40% of the per diem allowance    

Reimbursement or Per Diem

Reimbursement

Per diem for meal and incidental expenses only

Per diem that covers lodging, meals and incidental expenses equal to or greater than federal rate

Per diem that covers lodging, meals and incidental expenses less than federal rate

Federal per diem rates for the continental United States are available at gsa.gov.

You can deduct 80% of the cost of reimbursed meals that your employees consume while away from their tax home on business during or incident to any period subject to the Department of Transportation’s “hours of service” limits.

The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant or another location. It applies to expenses incurred at a business convention or reception, business meeting or business luncheon at a club.

The 50% limit doesn’t apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit.

Nonaccountable Plans

A nonaccountable plan is an arrangement that doesn’t meet the requirements for an accountable plan. All amounts paid or treated as paid under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees’ pay.

Protect Yourself From Identity Theft

Tips for keeping yourself safe from threats

There is no shortage of scams targeting both tax professionals and taxpayers. Due to the recent rise in identity theft cases, it’s important to be proactive about protecting yourself from these threats. The information below details some steps you can take to keep your sensitive data safe from identity theft.

Quick Protection Tips

Here are some tips to protect yourself from becoming a victim:

•     Don’t carry your social security card or any documents that include your social security number (SSN) or individual taxpayer identification number (ITIN).

•     Don’t give a business your SSN or ITIN just because they ask. Give it only when required.

•     Protect your financial information.

•     Check your credit report every 12 months.

•     Annually review your Social Security Administration earnings statement.

•     Secure personal information in your home.

•     Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.

•     Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know with whom you are dealing.

Identity Theft

Steps to take if you become a victim

If your tax return is rejected because of a duplicate filing under your SSN and you haven’t filed already, you may be a victim of tax identity theft. If this occurs, you need to report this to the IRS by following these steps:

•     Download IRS Form 14039, Identity Theft Affidavit.

•     Complete the form for each taxpayer that has been rejected. Note: In Section B, you’ll be checking Box 1.

•     Print the form and attach your correct tax return and form of identification.

•     Mail or fax according to the instructions.

It may take several weeks for the IRS to process Form 14039, but once it’s been processed, you’ll receive an acknowledgment letter.

If a fraudulent return is already present on your account, the IRS will send your case to the Identity Theft Victim Assistance (IDTVA) organization where it will be handled by employees who have specialized training.

Generally, you’ll receive notification that your case has been resolved within 120 days. Complex cases may take 180 days or longer.

Most tax-related identity theft victims will be placed into the Identity Protection PIN program and annually receive a new, six-digit IP PIN that must be entered on the tax return. The IP PIN adds an extra layer of identity protection.

Also note, the Federal Trade Commission (FTC) recommends that all victims of identity theft take the following steps:

•     File a complaint with the FTC at identitytheft.gov.

•     Contact one of the three major credit bureaus to place a fraud alert on your credit records: (1) Equifax, Equifax.com, 800.766.0008; (2) Experian, Experian.com, 888.397.3742; or (3)TransUnion, TransUnion.com, 800.680.7289

•     Contact your financial institutions and close any financial or credit accounts opened without your permission or tampered with by identity thieves.

Gift Giving through your business

If you give gifts in the course of your trade or business, you can deduct all or part of the cost. Following are the limits and rules for deducting the cost of these gifts.

$25 Limit

Your company can deduct no more than $25 for business gifts you give directly or indirectly to each person (employee or otherwise) during your tax year.

If your company gives a gift to a member of an employee’s family, the gift is generally considered to be an indirect gift to the employee. This rule doesn’t apply if you have a bona fide, independent business connection with that family member and the gift isn’t intended for the employee’s eventual use.

If you and your spouse both own companies and give gifts to an individual, your gifts are combined. It doesn’t matter whether you have separate businesses, are separately employed or have an independent connection with the recipient.

A gift to your company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be con­sidered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.

Incidental Costs

Incidental costs, such as engraving, packaging, insuring and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. A cost is incidental only if it doesn’t add substantial value to the gift.

Exceptions

The following items aren’t considered gifts for purposes of the $25 limit:

•     An item that costs $4 or less and has your name clearly and permanently imprinted on the gift, and is one of a number of identical items you widely distribute. Examples include pens, desk sets and plastic bags and cases.

•     Signs, display racks or other promotional material to be used on your business premises.

Employee gatherings may be tax deductible

Do you throw a holiday party, summer outing or a similar type of event for your employees? The expense of providing recreational, social or similar activities (including the use of a facility) for your employees is deductible and isn’t subject to the 50% limit. However, the benefit must be primarily for employees who aren’t highly compensated.

A highly compensated employee is an employee who meets either of the following requirements:

•     Owned a 10% or more interest in the business during the year or the preceding year. An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors and lineal descendants.

•           Received more than $120,000 in pay for the preced­ing year. You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year.