2016 tax strategies for insurance producers

The end of the year is upon us, but it's not too late to close out 2016 with some wise tax strategies for insurance producers. Feel free to share these with your clients as well - whether you sell personal lines or commercial lines. All of us would love to discover some extra deductions or credits!

Of course, these are general rules of thumb. To learn whether these tactics are best for your situation, consult with your tax advisor.

Increase your deductions.

  • Take all your deductions this year. That means pay your 2016 Q4 state income tax payment, medical expenses, deductible interest and alimony payments before January 1, 2017.
  • Do you work from home? Take the home office deduction. Tax experts say it does not trigger an audit, as most of us have thought in the past. However, that portion of your home - up to 300 square feet - must be used regularly and exclusively for business. By the way, "exclusively" means your kids can't come in and use your computer after work hours, for their homework. The allowable rate is $5 per square foot with a maximum of 300 square feet. That's a $1,500 deduction, for us non-math majors. Learn more from TurboTax or BankRate.
  • Maximize your IRA contributions. You'll thank yourself when you retire.
  • Charitable contributions are an immediate income tax deduction, and it doesn't have to only be cash. You can donate items such as clothing, toys, furniture - even a boat - and claim a deduction for fair market value. Also consider a charitable contribution using appreciated stock to reduce capital gains in your portfolio while also generating an income tax deduction.

Reduce your income.

  • Take the long view. This is the biggest of the tax strategies for insurance producers that we can offer you, to compare this year to next year. If you had a bonanza year, you're looking for deductions, so consider pre-paying your 2017 property taxes, pay your January mortgage payment in December, in addition to all the deductions listed above. On the other hand, if you're assuming next year your income will increase even higher, you won't want to prepay any of these items.
  • Afraid you didn't withhold enough? You may want to increase your 2017 W-2 federal income withholding amount in preparation of a significant tax bill or to avoid the under-withholding tax penalty. Yes, it 's probably to late to help you this year, but it just might save your bacon next year.
  • Consider deferring your year-end bonus to the following year, if you know your tax hit may be significant.
  • If you are 50 or older, take advantage of catching up on your 401(k), IRA or contributions to other qualified retirement plans. 

Related: Last-minute tax tips for insurance agents

More general tax strategies for insurance producers.

  • You can gift up to $14,000 per individual in federal tax-free gifts.
  • Max out your Health Savings Account contributions for 2016, and confirm you’ve spent the entire balance in your Flexible Spending Accounts.
  • Revisit contribution amounts to your 529 Plan college savings accounts.

Additional tax tips for agency owners

  • Know where you stand. Have your accountant or bookkeeper run year-end reports, and schedule time to walk through these reports so that you're clear on your financial status.
  • Protect your cash flow. If you're the agency owner, having adequate cash flow is vital, so figuring out your tax liability ahead of time can help you prevent disruptions to cash flow by putting aside money now or taking out a line of credit to pay the tax bill. 
  • Talk to your accountant about whether it makes sense to pay quarterly estimated taxes next year, so that you can pay taxes as-you-go throughout the year instead of having to find the cash for a large tax bill in April. (You may also need to pay estimated taxes throughout the year to avoid having to pay the IRS interest and possibly penalties.)
  • Make purchases. To maximize deductions, now's the time to spend money on business needs, stock up on office supplies, upgrade equipment.
  • Set up a retirement savings plan. Several options are available to you as the agency owner for retirement savings plans—SIMPLE IRA, SEP, 401(k), profit-sharing plan or IRA. They differ in the amount the employer can contribute, in their investment choices, and the ease and expense of setting them up. Whatever the plan, however, contributions you make for yourself and your employees may be tax deductible. Small businesses may also get a tax credit to help defray the cost of starting a retirement plan. You have until the due date of your tax return in 2017 to contribute funds to a retirement plan for 2016. But some types of plans must be established before the end of this year to get the tax deduction for 2016.
  • More reasons to set up a retirement plan. Entrepreneur says, " A properly designed 401(k) can be self-directed and utilized in... small business investments. Small business owners can deduct up to $51,000 with matching: That's $18,000 as your deferral before matching, with an additional $5,500 for those 50 and older. However, the payroll level you choose for yourself needs to be carefully considered."
  • Is your agency set up as an LLC (limited liability corporation)?  Ask your tax advisor about electing to be taxed as an S-corporation for 2016, if you find you're paying out a lot in self-employment tax. If you choose this route, you are required to take some payroll for yourself out of the company.Taking steps now to assess your tax liability so that you know whether to increase your deductions or reduce your income will help you finish out the year well.  

Take these tax strategies to your financial advisor to see which ones work best for you.


Additional sources:

7 Year-End Tax Tips for Small Business
5 End-of-Year Tax Tips for Small Business Owners