When it comes to the end of the year, it’s said that you should focus your tax-planning efforts on three main areas: deferring or accelerating revenue, deferring or accelerating expenses, and expiring tax provisions.
Let’s take a look at each one and give some examples.
Deferring (or Accelerating) Revenue
Generally speaking, the more revenue you have, the more taxable income you’ll have, and the more tax you pay. In most cases it doesn’t make sense to purposely reduce your revenue (“I want to earn less”, said no one ever!). But you may want to *defer* your revenue until next year.
It’s hard for a salaried employee to pull this off, because your employer has all of the control. But you could request that your boss pay you the end of year bonus in January.
If you have taxable investments that have seen positive gains, wait until the new year to sell any off.
If you are a contract employee, or if you have revenue from a small business, you may want to wait to invoice your clients until just before the new year. Doing so would likely delay payment until next year, and thus, reduce your revenue and overall taxes due this year.
Finally, if you’re in retirement and you can manage it, stop taking retirement plan withdrawals from now until January.
Keep in mind, once you start deferring revenue, you’ll have to keep this practice up from year to year, to keep pace (i.e. avoid having 13 months of revenue reported in one tax year).
Most people visit with a tax professional, or consult with the TurboTax TaxCaster tool prior to the end of the year to give them an idea if deferring income makes sense.
Accelerating (or Deferring) Expenses
Generally speaking, the more deductible expenses you have, the less taxable income you’ll have, and the less tax you will pay. In most cases it doesn’t make sense to increase your expenses just to avoid taxes. But it may make sense to accelerate your expenses (i.e. spend it now vs in the new year).
Remember, it can’t be just any type of expense. It should be tax-deductible expenses. Good examples include: medical expenses, mortgage interest, charitable donations, taxes (property, sales, state, local, etc.), education, job-related expenses, and childcare expenses. Take a look at this tax preparation checklist for more ideas. Don’t forget about taxable investing losses.
To accelerate these expenses, you would simply need to pay them before midnight on December 31, 2013. Like revenue, once you start accelerating expenses, you’ll need to keep up this practice from year to year.
Visiting with a tax pro is always wise to help you discover more ways to accelerate expenses.
Finally, there are the expiring tax provisions. Just like that last “for sale” item on the retail shelf, expiring tax provisions have a way of encouraging tax payers to act.
When it comes to this category we could be talking about tax rate changes (like we saw last year), changes in limits and deductions or credits, and changes as to what is considered income.
Rather than bore you will all of this year’s expiring tax provisions I’ll just point you to the Joint Committee on Taxation’s Expiring Provisions page. The biggest change I see for individuals is the change to the re-inclusion of income for principal residence debt discharge. In short, this means that if you’re going to do a short sale or bankruptcy, this is the year to do it – you won’t have to pay taxes on the debt forgiveness.
Okay, so to sum all of this up, when you’re trying to do tax planning at the end of the year, it’s important to focus on three areas: revenue, expenses, and expiring provisions.
Be sure to ask yourself:
- Based on my current situation, is it beneficial and possible to defer or accelerate my revenue?
- Based on my current situation, is it beneficial and possible to defer or accelerate my expenses?
- Are there any expiring tax provisions that I need to take advantage of?
Visit with a tax professional or consult the TurboTax TaxCaster to start playing with different scenarios.