Year-End Tax Planning 101 - Part 1

Year-end tax planning is not just reserved for the wealthy. Most of us could benefit from a little year-end planning.  I’ll review the concept at a high level and give you a few ideas to bring to your accountant or do yourself. December is a good time to evaluate your tax position and make adjustments. Aside from the suggestions below, you can work with an accountant in December to make sure you have paid in enough tax during the year to cover your liability. You can’t take any one of these suggestions individually – you need to think about how each one affects your whole tax picture.

Step 1: Know your tax position. Basic tax planning is about paying less tax in the long run, not over a single year. Before year-end, try to gauge whether your income is the same, higher, or lower than upcoming years.  You are better off planning around your income than trying to guess at future tax legislation – as of the date of this post, tax extenders for the current year haven’t even been passed.  

Step 2: Take action. If your income is the same or higher than normal:  You don’t really want to earn less money, of course. You can make some of your income tax-deferred, or you may be able to change the timing of your income and expenses if your job is flexible or you are self-employed.

Defer taxable income – Maximize your IRA and 401k or SEP accounts. I’ll cover these in more detail in future posts. These accounts essentially move your current income out of this year into a future year when you are retired.

Delay income – This is a bit easier if you are self-employed. If you have the option to receive payment in December or January, think about your tax position and receive the payment in January if it makes sense to move the income into another tax year.

Accelerate expenses – Business expenses, medical expenses, and other deductible expenses are recorded on the tax return in the year you pay them. This gives you the flexibility to reduce your income by paying expenses earlier.  In California, property tax is a good example. You can pay both halves of your property tax payment in December, rather than in December and April. Then, if you need to delay expenses in another year, you can split them up again.

Give to charity – This is recorded on the tax return as an itemized deduction.  You can time your gift to offset high income. As I do every year before the holidays, I just donated old toys today to make some room.

Harvest capital losses­ – If you have high capital gains, you may want to sell stocks with losses to offset some of these gains. 

If your income is lower than normal – stay tuned – that will be the topic of my next post.