Articles

What is Year-End Tax Planning?

By David M. Warrick, CFP

As the end of the tax year approaches, you can probably get a rough idea of how much you’ll owe in taxes. To lower your tax bite, it is wise to take certain steps at year-end. Numerous strategies exist to help you, including reviewing professionally developed year-end tax checklists, performing a marginal tax rate analysis to ensure that you won’t be pushed into a higher tax bracket unnecessarily, and postponing income and accelerating deductions (or vice versa).

Year-end tax planning and also investment decision-making may sometimes result in substantial tax savings. Year-end tax planning primarily concerns the timing and the method by which you report your income and claim your deductions and credits. The basic strategy for year-end planning is to time your recognition of income so that it will be taxed at a lower rate, and to time your deductible expenses so that they may be claimed in tax years when you are in a higher tax bracket. In a nutshell, you should try to do the following:

  • Recognize income when your tax bracket is lower
  • Pay deductible expenses when your tax bracket is higher
  • Postpone the payment of tax whenever possible


How can checklists help you?

Tax planners develop checklists to guide taxpayers toward year-end strategies that might help to reduce their taxes. These checklists offer several suggestions and are arranged in categories, such as “Retirement Planning Checklist.” The checklists trigger tax-savings ideas that may not have occurred to you. At the Tax Reduction Network, we provide these checklists during our clients annual reviews. Our clients have saved thousands of dollars by not overpaying their income taxes year after year! For instance, one suggestion may be to shift income at the year’s end to family members who are in lower tax brackets to minimize your overall taxes. Another suggestion might be for a married person to calculate his or her taxes two ways, using both married filing jointly status and married filing separately status, in order to minimize income tax liability.


How can a marginal tax rate analysis help you to save taxes?

A marginal tax rate analysis involves understanding the difference between your marginal tax rate and youreffective tax rate. If you know the rate at which your next dollar of income will be taxed, you may be able to engage in planning that will prevent you from being pushed into a higher tax bracket unnecessarily. If a higher tax bracket seems likely, you may be able to undertake certain strategies (such as deferring income and accelerating deductions) to lower your federal income tax burden.


What should you know about income and deduction strategies?

As stated earlier, you want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket. In general, taxpayers have a certain amount of control over the timing of income and expenses. Although deferring the recognition of income is usually desirable, there may be occasions when you might want to accelerate the recognition of income. For example, you may want to accelerate the recognition of capital gains if you have capital losses this year and need to offset them with capital gains. Also, you might want to accelerate income and postpone deductions this year if you expect to be in a higher marginal tax bracket next year.

Conversely, there are several reasons why you might want to postpone income and accelerate deductions this year. For instance, you might expect to be in a lower tax bracket next year because of retirement or unemployment. Also, if you lower your income enough this year, you may pay tax at a lower rate if you position yourself into a lower marginal tax bracket.

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