Year-End
Tax Planning Personal
Tax
Now that the close of another year is
upon us, it is time to consider year-end strategies that can
potentially reduce your tax bill. However, in order to make
effective use of the strategies we are about to discuss, it will help
significantly to have your prior year return in front of you along
with your latest pay stubs or income reports from your business. If
you don't know where you currently stand, it can be difficult to
impossible to make wise decisions about where you need to be. As
we will discuss below, many year-end tax strategies are only
appropriate under very specific situations that may not apply in your
particular case. As always,
please call our office if you are uncertain whether a specific
recommendation will benefit you. 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. Accelerating the following deductions has
the same tax effect as postponing income: 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. 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
training). 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. Charitable Contributions 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.
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