please call our office if you are uncertain whether a specific
recommendation will benefit you.
Defer Income / Accelerate Deductions
The knee-jerk reaction of most people doing year-end tax planning is to
defer income to the following year. While this is typically good
advice since a tax dollar saved now is worth more on a time-value basis
than a tax dollar saved later, there are caveats to consider.
If your taxable income is going to be
higher next year for some reason (better job, fewer deductions, etc), then
you may want to consider keeping your income in the current year when your
tax bracket is lower. Deferring income into a year with a higher tax
bracket can offset your time-value savings.
However, if you expect to be in a lower tax bracket next year, you
will certainly want to postpone income from this year to next. At the same time, you may want to accelerate your deductions in order to pay less tax this year.
These are a few of the most popular income items that are often deferred
or postponed a few weeks past year-end:
- Year-end bonuses
- Sales of capital gain property (or take installment payments rather than a lump-sum payment)
- Retirement account distributions (other than required minimum distributions)
Accelerating the following deductions has
the same tax effect as postponing income:
- Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction
- Prepay deductible interest (mortgage,
- Prepay alimony payments
- Make next year's charitable contributions this year
Watch Your Withholdings
If you think you may owe a substantial sum when you file this year's income tax return,
you may want to increase your federal income tax withholding amounts. If you have
other income in addition to your wages that makes you subject to estimated tax payments, there's an added benefit to
increasing your year-end withholdings instead.:
Even though the additional withholding may need to come from your last few paychecks,
it is generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty.
On the other hand, if you have significantly overpaid your taxes and estimate
that you will receive a large refund, you should reduce your year-end withholding
to possibly receive more money for the holidays rather than waiting
several weeks or months for a refund check.
If you operate a small business in
addition to your regular line of work such as selling on Ebay or raising
horses that generally loses money, you could be able to claim a tax
loss. You are allowed to deduct losses for what the IRS might
consider a hobby as long as you make a profit three out of every five
years (or two out of seven for horse racing, breeding, showing or
Many taxpayers manipulate the timing of receipts and
expenses with their small business/hobby so that they incur a small
operating profit in certain years and much larger losses in others.
If you are close to showing a profit on your sideline business this year,
it may be wise to postpone some expenses into next year so that you can
eke out a profit this year and take a large loss next year.
However, please be aware that the IRS can still
challenge your business losses even if you meet the profit/loss
rules. Your advantage is that the onus is on the IRS to prove that
your activity is a long-term loser. If you can demonstrate the
expectation of future gains from eventually selling all of your assets,
you should be safe from challenge.
If you are considering a contribution to your favorite charity and you
have appreciated stock or other investments that you have held for more
than a year, you may want to consider donating the investment to the
charity rather than cash. The reason is that you will avoid paying
tax on the appreciation of the investment, but you will still be able to
deduct the full market value as a contribution.
If you still want to maintain your position in the shares of stock, you
can simply repurchase the same number of shares after the donation.
The "wash sale" rules do not apply to stock shares that you sell
for a gain or contribute to charity. Also, do not be concerned that
your charity will not want the stock. Most charities are well aware
of the advantageous rules around donating appreciated property and will be
more than happy to assist you with the transaction.
Be Aware Of The Alternative Minimum Tax
The alternative minimum tax (AMT) was put into place many years ago as
a means to tax wealthy individuals who were sheltering large amounts of
income with tax shelters. With all the recent tax cuts however, more
and more middle-income taxpayers are falling victim to its provisions.
You could be subject to the AMT If you have any of the following: a large number of personal exemptions; large amounts of state and local taxes paid; large amounts of miscellaneous itemized deductions; large deductible medical expenses; the bargain element of incentive stock options
(ISOs); and/or large capital gains.
As you can see from the list above, year-end tax planning strategies
which consist of moving itemized deductions into the current year can
potentially make you subject to the AMT. The difficult tax planning
aspect of AMT is that each situation is unique so if you are concerned
that you may fall subject to its provisions, you may want to call our
office before making tax planning decisions.