The year-end holidays approach and bring lots of things to do. Yet with holiday cheer there are financial plans to make, too.

Consider these financial opportunities before 2022 arrives.

MAKE FINANCIAL GIFTS

As we count our many blessings and share time with our loved ones, we can express our thanks through giving to others. Donate to your favorite charity before year-end.

Generally speaking, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer's adjusted gross income. But did you know that the IRS has temporarily suspended limits on charitable contributions?

Sure it might change, but as of now, qualified contributions are not subject to this limitation and individuals may deduct qualified contributions of up to 100% of their adjusted gross income.

To qualify, the contribution must be a cash contribution and made to a qualifying organization. Contributions of non–cash property do not qualify for this relief. Taxpayers may still claim non–cash contributions as a deduction, subject to the normal limits.

You can gift assets or cash to your child, any relative, or even a friend, and take advantage of the annual gift tax exclusion. Any individual can gift up to $15,000 this year to as many other individuals as he or she desires a couple may jointly gift up to $30,000. Whether you choose to gift singly or jointly, you've probably got a long way to go before using up the current $11.7 ($23.4 million for couples) lifetime exemption.

Grandparents, aunts, uncles, and parents too can fund 529 college saving plans this way, but it is worth noting that December 31st is the 529 funding deadline.

MAX OUT RETIREMENT PLANS

Most employers offer a 401(k) or 403(b) plan, and you have until December 31st to boost your contribution. This year, the contribution limit on both 401(k) and 403(b) plans is $19,500 for those under 50 (it's going up by $1,000 next year) and $26,000 for those 50 and older. This year, the traditional and Roth individual retirement account contribution limits are $6,000 for those under 50 and $7,000 for those 50 and older.

But be careful because high earners face contribution ceilings based on their adjusted gross income level.

Remember IRA cash-outs. Once you reach age 72 you are required to take annual Required Minimum Distributions (RMDs) from your retirement accounts.

Your first RMD must be taken by April 1st of the year after you turn 72. Subsequent RMDs must be taken by December 31st of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount.

Did you inherit an IRA? If you have and you weren't married to the person who started that IRA, you must take the first RMD from that IRA by December 31st of the year after the death of that original IRA owner. You have to do it whether the account is a traditional or a Roth IRA.

Consider dividing it into multiple inherited IRAs, thus extending the payout schedule for younger inheritors of those assets. Any co–beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.

If your spouse died, then, you should file Form 706 no later than nine months after his or her passing. This notifies the IRS that some or all of a decedent's estate tax exemption is carried over to the surviving spouse.

Business owners' retirement plans. If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one–person 401(k), the so-called Solo (k). You don't have to be exclusively self–employed to set one of these up – you can work full–time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.

Contributions to SEPs and Solo (k) s are tax–deductible. December 31st is the deadline to set one up, and if you meet that deadline, you can make your contributions as late as April 15th next year (or October 15th with a federal extension).

You can contribute up to $58,000 to a SEP and this rises to $61,000 next year.

If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo (k) contributions can't be greater than the $19,500/$26,000 limits. But even so, you can still pour up to 25% of your net self-employment income into a Solo (k).

IRS INCREASES CONTRIBUTION LIMITS FOR NEXT YEAR

The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500, up from $19,500 for 2021 and 2020.

From the IRS website:

Highlights of Changes for 2022

"The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase–outs of the deduction do not apply.) Here are the phase–out ranges for 2022:

• For single taxpayers covered by a workplace retirement plan, the phase–out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase–out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase–out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase–out range is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income phase–out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase–out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate–income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key Employee Contribution Limits That Remain Unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch–up contribution limit for individuals aged 50 and over is not subject to an annual cost–of–living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch–up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000."

A SEP May Be The Way To Save On 2017 Taxes

In today’s tight job market, small business owners are in competition to attract and retain top employees with robust employee benefit packages. Many larger businesses find the best approach to meeting their employees’ retirement saving needs is a “qualified” pension or profit-sharing plan. Qualified plans provide an array of features that help employers achieve a range of objectives. However, these plans also involve reporting and recordkeeping requirements, along with administrative expense.

On the other hand, many businesses don’t need every feature offered by a qualified plan. The most appropriate plan for these employers may be one that delivers an attractive benefit with minimal administration and expense. In addition, if employees would like to defer income, the SIMPLE Individual Retirement Account (IRA) may be a cost-effective solution. However, small business owners and sole proprietors may want to consider the Simplified Employee Pension (SEP), an equally effective option.

Is a SEP Right for You?

In 1978, Congress created SEPs as an alternative to traditional retirement plans. Rather than setting up a profit-sharing or money purchase plan with a trust, small business owners can establish a SEP and make contributions directly to a traditional IRA set up for each eligible employee (including themselves). SEPs provide similar advantages to profit-sharing plans, but since the employee controls the IRA, the employer is not responsible for detailed recordkeeping and reporting.

While SEPs are usually most appropriate for small businesses and self-employed individuals, any business (including C corporations,
S corporations, partnerships, and sole proprietorships) can establish a SEP. Unlike a qualified pension or profit-sharing plan, which must be established no later than the last day of the plan year, an employer can establish a SEP plan up until their tax filing deadline, including extensions, which means you may still have time to set one up for 2017!

Establishing a SEP is relatively straightforward. In most cases, the business owner completes an IRS Form 5305-SEP, which is used to set the age and service requirements for plan participation, along with the formula for allocating contributions. Once completed, a copy of this document, in addition to other SEP information, is given to each eligible employee to satisfy legal disclosure requirements.

Participation Requirements

Small business owners may establish age or service eligibility requirements for their plans (in order to retain your employees); however, these eligibility requirements may not be more restrictive than those set forth within IRS form 5305-SEP. The employer may exclude all employees covered by a collective bargaining agreement (if retirement benefits were the subject of good faith bargaining), those under age 21, any employees who have not performed services for the employer in at least three of the previous five years, and employees who have received less than $550 in compensation for the current year.

Contributions to a SEP are allocated to eligible employees in proportion to compensation, with each receiving the same percentage of pay. Employer contributions are always 100% vested. These contributions can be substantial, up to the lesser of 25% of an employee’s compensation (limited
to $270,000 or $54,000 in 2017).

A SEP can provide a substantial tax planning opportunity for the owner. Consider the following example: A CrossFit Affiliate with $250,000 of net income for 2017 that will be passed through to its owner(s) (LLC taxed as S Corp.). Assuming the owner is single with no other income, a $25,000 contribution to a SEP would result in $8,250 of tax savings realized by the owner(s) (Based on 33% marginal tax rate). In other words, a $25,000 contribution towards the owners’ retirement only costs the owner $16,750!

Because contributions are discretionary, employers can vary the amount from year to year, or skip the contribution entirely; however, if the employer makes a contribution in a given year, it must be made for all eligible employees who performed services during the year of the contribution. It is important to note that contributions for self-employed individuals are subject to additional limitations.

If you are a small business owner who values simplicity, wants to retain key employees and get a tax brake for doing, a SEP may be an appropriate choice. For more information, please contact me at ivan@otbfinancialplanning.com. If you found this article helpful, sign up for our newsletter to receive the latest strategies and insights.

The White House recently introduced what it billed the “biggest tax cut” in U.S. history. While a presidential tax proposal is not likely to get passed without significant changes, the fact that Republicans dominate both chambers of Congress suggests 2017 may well be a year in which significant tax reform is engineered.1

One thing should be perfectly clear: The U.S. tax code is highly complicated.2 There may not be anyone who understands it all off the top of their head. CPAs and tax professionals must conduct thorough due diligence to tailor strategies and complete returns for taxpayers with complex situations.

Because of this, we recommend our clients who require tax advice work directly with an experienced and qualified tax professional. However, we also believe financial and tax professionals should not work in a vacuum, and therefore are more than happy to work in concert with our clients’ tax advisors to help align their financial strategy with their tax situation.

This is particularly important when it comes to retirement planning, because you want to save as much as possible before you retire, which may include tax-deferred financial vehicles such as a 401(k) or IRA, but you don’t want to get hit with a big tax bill on untaxed earnings once you’re in retirement.3 This is a delicate balance that requires experience and collaboration from both a financial professional and a tax professional.

One tax issue each of us deals with is the federal income tax rate. Our annual earnings determine which federal tax bracket we land in, but that tax bracket isn’t the tax rate applied to our entire income. Instead, we pay every tax rate on income blocks up to our individual bracket. Like many things about filing taxes, this can be highly confusing for many people.

It may be easier to understand this through a hypothetical example. Let’s say Joe, who is single, had $92,000 of taxable income in 2016, which landed him in the 28 percent tax bracket. This is how his total tax is calculated:4

• He pays 10% on the first $9,275 (tax of $927.50)
• He pays 15% on the next $28,375 (tax of $4,256.25)
•  He pays 25% on the next $53,500 (tax of $13,375)
•  He pays 28% on the final $850 (tax of $238)
  • Total tax bill of $18,796.75

As you can see, Joe doesn’t pay 28 percent on the full amount of his taxable income; his taxable amount progresses through each income bracket and their respective tax rates until it reaches his total taxable income for the year. Therefore, a person who falls in the highest tax bracket is only paying that higher tax rate on a portion of his or her income.

This is an important distinction to remember as the U.S. works toward tax reform. On one hand, reducing the number of tax rates from seven to three (Trump’s proposal: 10 percent, 25 percent, 35 percent)5 looks to simplify tax filings, but for many people, this could mean paying a higher tax rate on larger blocks of income. Let’s take the hypothetical example of Joe again, using the same income brackets (to date, no tax rate income brackets have been proposed). Here’s how Joe’s scenario might break down:

• He pays 10% on the first $9,275 (tax of $927.50)
• He pays 25% on the next $81,875 (tax of $20,468.75)
• He pays 35% on the final $850 (tax of $297.50)
  • Total tax bill of $21,693.75

This example simply illustrates how a progressive income tax works. Obviously, it doesn’t take into consideration credits and deductions, which vary substantially among taxpayers. Nor does it include payroll taxes.6

Federal income brackets and their respective tax rates are the most fundamental issues Americans are subject to when filing taxes. But as you can see, there’s nothing straightforward about them. This is worth remembering as tax reforms continue to be proposed and debated moving forward: Nothing concerning taxes is simple, and there are usually layers that impact us that the average layperson isn’t likely to see.

Content prepared by Kara Stefan Communications

1 Fox News. April 26, 2017. “Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate.” http://www.foxnews.com/politics/2017/04/26/mnuchin-vows-biggest-tax-cut-in-us-history-confirms-plan-to-slash-corporate-rate.html. Accessed May 5, 2017.

2 Vanessa Williamson. The Atlantic. April 18, 2017. “How the Tax-Filing Process Confuses Americans about Tax Policy.” https://www.theatlantic.com/business/archive/2017/04/paying-taxes-confusion-policy-1040/523287/. Accessed May 5, 2017.

3 Fidelity. March 1, 2017. “How to invest tax efficiently.” https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy. Accessed May 5, 2017.

4 Tina Orem. Nerd Wallet. Sept. 8, 2016. “2016 Federal Income Tax Brackets.” https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/. Accessed May 5, 2017.

5 Martha C. White. NBC News. May 2, 2017. “Even Families Making $100K Won’t Be Better Off Under New Tax Plan.” http://www.nbcnews.com/business/taxes/even-families-making-100k-won-t-be-better-under-new-n753941. Accessed May 5, 2017.

6 NPR. 2017. “On Tax Day, an Economist Outlines How the Payroll Tax Works.” http://nhpr.org/post/tax-day-economist-outlines-how-payroll-tax-works#stream/0. Accessed May 5, 2017.

These hypothetical examples are for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with qualified professionals about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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