For most people, dealing with their own taxes is as much fun as going to the doctor for an annual checkup. Similarly, the only time taxpayers truly get involved is once a year in early April as the filing deadline looms. Unfortunately, by that time, there is very little they can do to reduce their taxes for the prior year.
Planning ahead often leads to the discovery of otherwise overlooked opportunities that may be used to improve your financial well-being. By considering specific tax-saving strategies now, you may be able to reduce your tax bill before it is too late.
While tax planning must be customized to an individual’s particular circumstances, there are several tactics that everyone should consider as the year’s end approaches.
Smart Business learned from Brent Saunier, CPA, tax manager with Tauber & Balser, P.C., some fundamental tax-planning techniques.
What are some of the tax-planning fundamentals an individual should know?
Your tax bracket: A good way to begin your planning is by estimating your 2007 and 2008 adjusted gross income (AGI). This simple step is essential because many tax breaks are tied to or limited by your AGI. Knowing your tax bracket allows you to better predict the effects of certain tax-planning strategies.
Defer income: In potentially high-income years, consider deferring some income. If your employer will agree to defer payments into 2008, those salary and bonus amounts would not be taxed to you until 2008. If you expect to be in a higher income tax bracket next year, you may be better off accelerating income into the current year.
Installment sales: An installment sale allows you to defer capital gains on most assets. You can defer your overall tax burden by spreading the gain over several years as you receive the proceeds.
Timing capital gains and losses: Consider deferring the sale of appreciated stock until January to postpone gain recognition. Likewise, sell depreciated stocks before the end of the year to offset other gains you may have incurred.
Bunching miscellaneous deductions:
Consider bunching miscellaneous deductions investment expenses, job hunting expenses, tax preparation and unreimbursed business expenses into a single year to increase the amount that exceeds the 2 percent AGI limitation.
Accelerate deductions: A simple example of accelerating deductions is your state tax deduction. Your state income tax payments are an itemized deduction against your federal taxable income. If you make an estimated state tax payment before Dec. 31, you can deduct it this year rather than next year. The same approach could be taken in regards to paying your real estate taxes prior to the year’s end. Be sure to consider the alternative minimum tax (AMT) before accelerating these deductions.
Retirement contributions: Consider contributing the maximum amount to retirement arrangements whether employer-sponsored or an IRA. The contribution limit for traditional and Roth IRAs increases to $5,000 for 2008. A ‘catch-up’ provision permits an additional contribution of up to $1,000 by individuals who are at least age 50.
What are some of the tax-planning techniques for businesses?
Consider business structure: The differences in tax treatments of different entity structures may provide planning opportunities. For example, to reduce the 2.9 percent Medicare tax, S corporation shareholder-employees may want to maintain reasonable salaries and increase the distributions of company income.
Depreciation deductions: In lieu of depreciation, business taxpayers can expense up to $125,000 of the cost of equipment or other tangible personal property placed in service during the year. Claiming an all-at-once deduction may be preferable to depreciating the asset(s) over time. The maximum amount will increase slightly to $128,000 in 2008.
Maximize tax credits: Tax credits reduce your business’s tax liability dollar-for-dollar. Several tax credits that had expired at the end of 2005 have been extended through 2007, including the empowerment zone and the research and development credits. Don’t forget to examine the state credits allowed in your jurisdiction.
Accounts receivable: If your tax return is prepared on the accrual method of accounting, you are paying tax on sales when they are transacted, not when the cash is actually collected. Analyze your accounts receivable to determine if there are accounts that are uncollectible. The write-off of uncollectible accounts will prevent you from paying tax on ‘phantom’ income.
Cost segregation: Commercial property is generally depreciable over a 39-year period using the ‘straight line’ method. However, certain components of a building may qualify for significantly shorter depreciation periods and an accelerated method of depreciation. Keep this in mind if you are buying, building or renovating a property.
These are only a few of the many techniques and considerations taxpayers should contemplate when doing year-end tax planning. There are many other strategies and techniques that may be employed to lower your taxes. Year-end planning must be done prior to Dec. 31. Once the year ends, you can only plan for the next year.
BRENT SAUNIER, CPA, is a tax manager at Tauber & Balser, P.C. with more than 10 years of experience in accounting operations and financial management. He has worked extensively in industries such as distribution, heath care, manufacturing, professional services, retail service and trucking. Reach him at (404) 814-4960 or firstname.lastname@example.org.