Tax planning is not just a task to tackle hastily as December 31 approaches or a source of panic right before April 15. It is a year-round activity that requires continuous attention and consideration. Let’s explore some personal and business tax issues you can address throughout the year to make your tax planning more effective and personalized.
Personal Tax Matters
Throughout the year, there are five personal tax issues that you can proactively manage:
Timing your income:
Consider delaying income recognition where it makes sense. Individual income tax rates have remained steady in recent years, and tax brackets have increased modestly. If you anticipate a lower marginal tax rate in the future, it might be advantageous to postpone income, such as discretionary bonuses.
On the other hand, if you expect your marginal rate to rise in the coming years, accelerating taxable income when your rate is lower can be beneficial. Assess the timing implications and make informed decisions about when to pay your taxes.
Assessing capital gains and losses:
Regularly review your investment transactions to determine if you have any net gains. If you do, consider selling some losing positions to offset those gains. You can utilize up to $3,000 of net capital losses to reduce your taxable income. Any unused realized losses can be carried forward to future years.
Optimizing charitable contributions:
If you plan to make charitable contributions at year-end, consider donating appreciated stock instead of cash. This lets you deduct the full fair market value of the stock and avoid paying capital gains tax.
Maximizing retirement contributions:
Take advantage of opportunities to contribute to your retirement plan. Individuals aged 50 and over can make “catch-up” contributions to IRAs and 401(k) plans. Seize these options to secure your retirement years.
Understanding the alternative minimum tax (AMT):
Be mindful of the alternative minimum tax, which was initially designed to ensure high-income taxpayers pay their fair share. This complex additional tax can catch many individuals off guard. If you have a relatively high income or significant itemized deductions, particularly related to income or property taxes, consult your tax advisor about the implications of the AMT. It can also apply to those with incentive stock options.
Business Tax Concerns
Here are three business tax issues that warrant year-round attention:
Maximizing retirement benefits:
Make sure you derive the maximum tax benefits from your participation in any retirement plans. Consider contributing to an IRA, even if the contribution is not deductible. By putting funds into an IRA with tax-deferred growth, you can save money over time.
Managing wages:
As a business owner, you can control when you pay yourself, especially with year-end bonuses. To choose the best option, understand how your business’s tax situation relates to your personal tax obligations.
Optimizing deductions:
Ensure that you take advantage of all the deductions you are entitled to. If you use your personal vehicle for business purposes or have a home office, review the relevant rules to maximize your benefits. The IRS allows taxpayers to choose to expense the cost of any Section 179 property and deduct it in the year the property is put into service. Keep meticulous records to support any travel and entertainment expenses.
Don’t Wait Until It’s Too Late
Tax planning isn’t a one-time event; it’s an ongoing process that requires year-round attention. By addressing personal and business tax matters, you can make informed decisions, optimize your tax position, and potentially reduce your tax liability.
Give us a call to tailor your tax planning strategy to your unique circumstances and financial goals.