Written by Joslyn G Ewart, CFP® — Proud NAWBO member for over a decade
The good news about building your business is that you can fulfill your passions and the resulting revenue may enable you to enjoy a comfortable life, with the freedom of more choices. There is a consequence, however, that you may need to manage: Taxes. In fact, the sizable dollar figure reported on line 16 of your annual 1040 tax return: “This is your total tax,” may seem remarkable even if your income tax rate is average. Because of this, we would like to share three tips that may help you or someone you love to reduce their income tax liability in the year ahead.
Tip One: Consider maximizing your HSA plan
Health Savings Accounts (HSA) are increasingly popular with consumers, as health insurers shift insurance options to high-deductible plans. Such plans are tax-advantaged medical savings accounts. You are eligible to establish one if you are enrolled in a high-deductible plan (and are not covered by a spouse in a non-high deductible plan or on Medicare.)
Not only will your HSA contributions be tax-deductible, but your capital gains, dividends and interest accumulate tax-free. We love these tax-reducing benefits—but it gets better. Upon meeting a minimum cash maintenance threshold (usually $1 - $2,000), your financial institution may assist you with opening a Health Savings Brokerage Account (HSBA). This permits you to aim for appreciation in your account over time, too.
Step Two: Use IRA distributions to fund your charitable gifts
Investors who are over the age of 59 ½ may distribute directly from their IRA or Inherited IRA to the charity or charities of their choosing. While it is important to confirm this with your CPA, you will likely avoid taxes on these gifts made directly from your account. In fact, the financial institution where your IRA is held may prepare the donation checks for you or provide you with an IRA “checkbook” of about ten checks—specifically intended to fund your charitable gifts.
Step Three: Maximize your retirement plan contributions
An “oldie but goodie,” we must mention the tax-reducing benefits of contributing to all retirement plans for which you are eligible. As a business owner, maximizing your tax-deferred investing each year can not only reduce the Line 16 liability mentioned earlier, but also become the ticket to a well-funded retirement. And for your employees, remember the loyalty benefit of offering your valued employees just the right 401(k) plan—which helps them have robust retirement savings, too!
Fellow NAWBO member Entrust owners and advisors Mckenzie Frankel and Jennifer Bravo specialize in helping business owners to maximize their retirement savings. We welcome the opportunity to review your planning with you to confirm that you are on track. We look forward to hearing from you at any time with questions you may have and are easy to reach: 610-687-3515 or by email: contactus@entrustfinancial.com.