Year-end tax planning and investment decisions can result in significant tax savings. The following are some common planning strategies that you can consider.
- Recognize income when your tax bracket is lower.
- Pay deductible expenses when your tax bracket is higher.
- Postpone payment of tax when possible.
Let’s look at how to implement some of these planning strategies:
In a Lower Tax Bracket?
If you are in a low tax bracket you may want to recognize income to utilize deductions that would otherwise be lost or simply take advantage of the lower tax brackets. Consider accelerating income by taking retirement distributions before the end of the year or converting a traditional IRA to a Roth IRA. You could also consider selling investment securities to generate capital gains.
In a Higher Tax Bracket?
When you are projected to be in a high tax bracket you may want to look at paying deductible expenses in that same year to lower your taxable income. You can do this by increasing your itemized deductions or even doubling up on them. For example, you can pay your property taxes, an extra mortgage payment or accelerate payment of your medical expenses before the end of the year. You can also make charitable contributions to qualified organizations. Consider making those charitable gifts using appreciated securities which you have held for 12 months or more to avoid paying capital gains tax on the appreciation.
If your tax bracket isn’t changing, consider taking advantage of deferring income, such as year-end bonuses or collection of income. Finally, make sure you are taking full advantage of retirement saving vehicles such as 401(k) plans or IRAs.
It is always a good idea to consult your tax advisor when employing any of these strategies. A little planning can make a big difference!