5 Year-End Tax Tips To Reduce Your Bill

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5 Year-End Tax Tips To Reduce Your Bill

If you’re self-employed, there are lots of things you can do by December 31 to lower your taxes for 2016. Let’s go over five ways to lower taxes before the end of the year.

Last-Minute Tax Tips To Reduce Your Tax Bill

Defer Income to 2017

With the election of Donald Trump and a Republican-controlled Congress, it is likely that massive across-the-board tax cuts will be enacted in 2017. It is unclear when these cuts would take effect. They could be delayed until 2018. Nevertheless, it is almost certain that individual tax rates will be lower in 2017 and later than in 2016.

To take advantage of these cuts you should defer as much income as possible from 2016 to 2017. For example, if you’re owed a bonus from your job, ask that it not be paid until 2017. Likewise, don’t bill or press clients for payment until January.

Buy Stuff for Your Business

If you’ve been thinking about buying equipment to use in your business, do so by the end of the year. This could include cars, computers, software, yard signs and more.

Smaller businesses can usually deduct in a single year the full cost of equipment and supplies instead of having to depreciate it over several years. This is not true for passenger cars, however, for which annual deductions are capped. The more you buy the more you can deduct.

Remember, never buy anything just to get a tax deduction. You still have to pay for these things eventually, so aim to only buy things your business actually needs. You can pay for these items with your credit card and deduct the entire amount this year. This is true even if you don’t pay off your credit card until 2017 or later.

Prepay Expenses

If you’re a cash basis taxpayer (most self-employed people are), you can prepay certain business expenses up to 12 months in advance and take a deduction this year. Such “qualifying expenses” include lease payments on business vehicles, rent payments for office space and machinery, and business and malpractice insurance premiums.

For example, in December you could send your landlord a check to cover the first six months of rent for your office space and deduct the entire amount in 2016.

Sell Losing Stocks

If you have stocks that have gone down in value since you purchased them, sell enough before the end of the year to have at least $3,000 in losses. If your total capital losses exceed all your capital gains for the year you may deduct up to $3,000 of these losses from your ordinary income for 2016. That is, the income you make from your business. If your overall capital loss is more than $3,000, the excess carrier over to the next year.

Establish and Fund Retirement Plans

The government allows self-employed workers to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits. This includes tax deductions for plan contributions and tax deferral on investment earnings until retirement. There are many retirement accounts available: solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans.

How much your can contribute each year depends on the type of plan you have and the amount of your net earnings from self-employment. For example, the maximum contribution for a solo 401(k) plan is 20% of your net self employment earnings, plus an elective deferral contribution of up to $18,000. The maximum total contribution for 2016 is $53,000. That’s up to $53,000 you can deduct from your taxable income for income tax purposes.

You can contribute to these plans and take a deduction for 2016 up until the time your tax return for the year is due. This means you can contribute until April 15, 2017 or October 15, 2017 if you file an extension. However, you must establish a solo (401)(k) by December 31, 2016 to take 2016 deductions for your contributions.

Stephen Fishman

Stephen Fishman

Stephen Fishman is a self-employed tax expert and regular contributor to MileIQ. He has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for entrepreneurs, independent contractors, freelancers and other self-employed people. He is the author of over 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Visit Fishman Law and Tax Files for more information on his work.
Stephen Fishman

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.