Tax Planning: A Year-Round Task

Tax planning is a 12-month activity. It's not something you try to fix fast as Dec. 31 approaches or a task to panic about right before April 15. Below are some items you can address throughout the year, in conjunction with your tax adviser.

Personal tax issues

Delay taxation where appropriate. The individual income tax rates have remained constant for the past several years, while the sizes of the tax brackets have been increased modestly. If you expect that your marginal income tax rate will be lower in future years, it may be beneficial to delay income (such as discretionary bonuses) where possible. Conversely, if you expect your marginal rate to increase in future years, it may be beneficial to accelerate taxable income into a year when your marginal rate is lower. In all cases, you should consider the timing implications of when you'll pay the tax.

Review your capital gains and losses. Be sure to examine your transactions to see if you have any net gains. If you do, consider selling some losing positions to offset them — you are allowed to use up to $3,000 of net capital losses to reduce your taxable income. Unused realized losses can be carried forward.

Review your charitable contributions. If year-end charitable contributions are in your plans, consider contributing appreciated stock instead of cash. You get the deduction for the full fair market value and avoid paying tax on the gain.

Contribute to your retirement plan. Individuals aged 50 and over can make "catch-up" contributions to IRAs and 401(k) plans. Be sure to take as much advantage as you can to secure your retirement years.

Beware of the alternative minimum tax. Originally enacted to force high-income taxpayers to pay tax, this complicated additional tax is catching many people unaware. If your income is relatively high or if you have high levels of itemized deductions (especially income or property taxes), you will need to discuss this with your tax adviser. The AMT can also apply to individuals with incentive stock options.

Business tax issues

Qualified retirement plans. Be sure to get the maximum tax benefits from any retirement plan you participate in. Consider making contributions to an IRA, even if the contribution will not be deductible. Getting funds into an IRA where the earnings are tax deferred will save you money.

Control your wages. Many business owners can control when they pay themselves, especially year-end bonuses. Be sure to understand the interplay between your business's and your personal tax situation to get the best solution.

Maximize your deductions. Be sure to take all the deductions to which you are entitled. If you use your personal automobile for business or have a home office, review the rules to get the maximum benefit. The IRS also notes that taxpayers may elect to expense the cost of any Section 179 property and deduct it in the year the property is placed in service. Be sure your records support any travel and entertainment expenses.
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Please give me a call in the coming weeks to discuss these ideas and others that may apply to your situation.