If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2019.

The basics

Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers and online businesses now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.

As the employer, you can choose from two contribution options:

1. Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. You must make the contribution regardless of whether the employee contributes. This applies to compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).

2. Match employee contributions up to 3% of compensation. Here, you contribute only if the employee contributes. This isn’t subject to the annual compensation limit.

Employees are immediately 100% vested in all SIMPLE IRA contributions. 

Employee contribution limits

Any employee who has compensation of at least $5,000 in any prior two years and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE IRA.  SIMPLE IRAs offer greater income deferral opportunities than ordinary IRAs, but lower limits than 401(k)s. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can also make a catch-up contribution of up to $3,000. This compares to $5,500 and $1,000, respectively, for ordinary IRAs, and to $18,500 and $6,000 for 401(k)s.

A SIMPLE IRA might be a good choice for your small business, but it isn’t the only option. Contact your trusted advisor to learn more about a SIMPLE IRA or to hear about other retirement plan alternatives for your business.

Contact your trusted advisor with any questions.

During the course of your career, you may have managed to build up a tidy nest egg, most likely augmented by tax-favored saving devices. For instance, you may have accumulated funds in qualified retirement plans, like 401(k) plans and pension plans, and traditional and Roth IRAs. If you don’t need all the funds to live on, your goal likely is to preserve some wealth for your heirs.

Can you keep what you want? Not exactly. Under strict tax rules, you generally must begin taking required minimum distributions (RMDs) from your retirement plans and IRAs (except Roth IRAs) after age 70½. And you must continue taking RMDs year in and year out without fail. Don’t skip this obligation for 2017, because the penalty for omission is severe.

When should you begin taking distributions?

RMD rules apply to all employer-sponsored retirement plans, including pension and profit-sharing plans, 401(k) plans, 403(b) plans for not-for-profit organizations and 457(b) plans for government entities. The rules also cover traditional IRAs and IRA-based plans such as SEPs and SIMPLE-IRAs. But you don’t have to withdraw an RMD from a qualified plan of an employer if you still work full-time for the employer and you don’t own more than 5% of the company.

The required beginning date for RMDs is April 1 of the year after the year in which you turn age 70½. For example, if your 70th birthday was June 15, 2017, you must begin taking RMDs no later than April 1, 2018. This is the only year where you’re allowed to take an RMD after the close of the year for which it applies. (Keep in mind that delaying the first RMD will result in two RMD withdrawals during that tax year.) The deadline for subsequent RMDs is December 31 of the year for which the RMD applies.

What’s the penalty for failing to take RMDs?

The penalty is equal to a staggering 50% of the amount that should have been withdrawn, reduced by any amount actually withdrawn. For example, if you’re required to withdraw $10,000 this year and take out only $2,500, the penalty is $3,750 (50% of $7,500). Plus, you still have to pay regular income tax on the distributions when taken.

Keep in mind that with the additional income there are other tax issues, such as the net investment income tax (NIIT). RMDs are not subject to the NIIT but will increase your modified adjusted gross income for purposes of this calculation and thus could trigger or increase the NIIT.

The IRS has issued its cost-of-living adjustments for 2016. Inflation remains low, so many amounts are the same as last year, and those that did increase did so only modestly. Nonetheless, it’s helpful to know the 2016 amounts as you evaluate which 2015 year-end tax planning strategies to implement.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $50 to $100, depending on filing status, but the top of the 35% bracket increases by $1,050 to $2,100, again depending on filing status.

The personal and dependency exemption increases by only $50, to $4,050 for 2016. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2016, the phaseout starting points increase by $700 to $1,400, to AGI of $259,400 (singles), $285,350 (heads of households), $311,300 (joint filers), and $155,650 (separate filers). The exemption phases out completely at $381,900 (singles), $407,850 (heads of households), $433,800 (joint filers), and $216,900 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $311,300 (up from $309,900) for joint filers, $285,350 (up from $284,050) for heads of households, $259,400 (up from $258,250) for singles and $155,650 (up from $154,950) for separate filers.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2016, the threshold for the 28% bracket increased by $900 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2016 are $53,900 for singles and heads of households and $83,800 for joint filers, increasing by $300 and $400, respectively, over 2015 amounts. The inflation-adjusted phaseout ranges for 2016 are $119,700–$335,300 (singles and heads of households) and $159,700–$494,900 (joint filers). (Amounts for separate filers are half of those for joint filers.)

Education- and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2016. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2016, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2016: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. For 2016, the MAGI phaseout range for this education credit (maximum $2,000 per tax return) increases only for joint filers, to $111,000–$131,000 (up $1,000). The phaseout range remains at $55,000–$65,000 for other filers.

The adoption credit. The MAGI phaseout ranges for this credit also increase for 2016 — by $910, to $201,920–$241,920 for joint, head-of-household and single filers. The maximum credit increases by $60, to $13,460 for 2016.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Retirement plans

Retirement-plan-related limits remain unchanged for 2016:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Most IRA-related MAGI phaseout range limits remained unchanged in 2016:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:

   

  • For a spouse who participates, the 2016 phaseout range limits remain the same as 2015: $98,000–$118,000.
  • For a spouse who doesn’t participate, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2016 phaseout range limits remain the same as 2015: $61,000–$71,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers, the 2016 phaseout range limits also increase by $1,000, to $117,000–$132,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2016 the amount is $5.45 million (up from $5.43 million for 2015).

The annual gift tax exclusion remains at $14,000 for 2015. It’s adjusted only in $1,000 increments, so it typically increases only every few years. It increased to $14,000 in 2013, so it might go up again for 2017.

New year, the same or similar numbers

With inflation in check this year, many 2016 cost-of-living adjustment amounts are $0, and where there are adjustments, they’re minimal. If you’re unsure how this may affect your year-end tax planning or retirement planning, please contact us. We’d be pleased to help you tweak your plans based on next year’s adjustment amounts.