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Duvall & Associates, Inc. ‘Tax plan well before year-end’ - by Published in “It’s too late, baby, now it’s too late.” Carole King. Hot off the presses, your tax return arrives. A quick glance to the final line and (OUCH!) you owe more monies than you could have imagined. So it’s back to the shoebox to ferret out more deductions. Is this familiar territory? Sadly filing time is really too late for tax planning. Truly effective tax reductions culminate from year-round financial maneuvers. Almost three months before December 31. What tax options remain? Most taxpayers are on the cash basis of taxation - income and deductions are generally reportable when the cash comes in or goes out. Thus, timing transactions is relatively easy - just follow the cash. Need more deductions? Simply prepay deductible expenses such as real estate taxes, interest and charitable contributions before year end. Want more bang from the deduction buck next year? Delay payments. The timing of deductibles is made ridiculously more complicated by income-sensitive phase-out provisions. Since many deductions fade away as taxpayer income rises, income/expense bunching in one year may minimize such limitations. Similar strategies could also reduce the impact of the goofy alternative minimum tax. Some categories of losses are not deductible without the presence of off-setting income. For example, only capital losses in excess of $3,000 can only reduce capital gains. Similar rules apply to investment interest expense, hobby losses, passive rental losses and net operating losses. Again, synchronizing transactions becomes paramount. Maximize pension, 401(k) and IRA opportunities for the year. New pension plans may have to be initiated before December 31 to provide current benefits. And taxpayers over 50 may deduct “catch-up” contributions (in excess of normal plan limits) to pension and IRA accounts. Individuals may make tax-free gifts of $12,000 per year, a nice strategy to remove excess assets from estates. Over or under-paid taxes for the year? There’s time left to adjust payroll withholdings or even quarterly estimates to accommodate the difference and avoid unnecessary penalties. Most tax planning is simply deferring tax payment until the last moment, preserving deductions and taking advantage of lower rate brackets, if possible. And the tax penalty for procrastinators? “There’s something wrong here, there can be no denying. I can’t hide and I just can’t fake it.”
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