The Clock Is Ticking! Tips to Prepare for Tax Season
1. Review Your Income and Deductions
Know where you stand; this is a fundamental step that can help you save taxes. If your income is high, consider deferring the receipt of more income at year’s end (e.g. asking your employer to hold off on your bonus until January or waiting to send out December’s billings until closer to the end of the year). If you are close to the line in terms of itemizing deductions, speed up the payment of deductible expenses.
Next, think ahead to next year. If you think that your tax rates will be higher then, you might switch gears and accelerate income to reduce that burden. We’ll help you figure out the best approach.
2. Alternate Deductions
If you are close to exceeding the standard deduction with itemized deductions, “bunch” your payments into one year. This will allow you to itemize. Next year, use the standard deduction. The following year, itemize.
You can also time your deductible expenses strategically: for example, if you pay your state income tax estimate and/or property taxes, make an extra mortgage payment, pay your tax preparer, or opt for dental work before December 31, you can accelerate your federal deduction. Remember that you cannot deduct payments that are made before the services are performed.
3. Give Back
Cash contributions and credit card donations are tax-deductible. You may also gift appreciated property to charity, in which case you can deduct the full market value. Some properties require an appraisal. It feels good to give back without any expectations, but a tax deduction certainly doesn’t hurt either!
4. Contribute to a Deductible Retirement Plan
Plan for the future and optimize your tax situation at the same time. If you are contributing to a qualifying IRA, you have until the April tax deadline to open and contribute for the prior year. If your company offers a 401(k), check on the maximum allowable contribution.
If you are self-employed and have a Keogh, you must create the plan before year-end, but you have until the April tax deadline to make a deductible contribution. Some plans, like SEPs, allow you to create and contribute for the previous year until the April tax deadline.
5. Consider Adjusting Your Income Tax Withholding
Regardless of when the tax is withheld, they are considered paid in equal amounts during the year. If you make a year-end adjustment, you may avoid an underpayment penalty.
6. Time Important Marital Status Changes
If you are planning to be married or divorced, your marital status as of December 31 determines your status for the entire year. If you can, changing the date of a planned year-end event can help you save taxes.
7. Do an AMT Computation
If you have tax preference items (e.g. interest on private activity municipal bonds, qualifying exclusions for small business stock, etc.) do an alternative minimum tax (AMT) computation. If this applies to you, consider shifting income or deductions.
8. Offset Capital Gains
Should you sell off some losers before December 31? You may be able to offset capital gains that you have already realized. Capital losses are netted with capital gains and are deductible against ordinary income of up to $3000/year.
9. Plan for Losses
If you are a shareholder in an S corporation and expect a loss, check your basis (i.e. the amount of your investment in the business for tax purposes). Is it sufficient to allow you to take the loss on your tax return?
10. Think Twice
Do not rush into actions or maneuvers you believe will reduce your tax bill. In some cases, you end up creating other problems. Transactions for the sake of tax benefits can, and do, backfire.
Faw & Associates is happy to discuss your unique situation and set up a personalized tax plan that meets your needs. Contact us for more information.