With the new year quickly approaching, it’s time to make some strategic moves to lower your tax bill.
Strategy:
Prepay Deductible Expenditures
If you itemize deductions, accelerating some deductible expenditures into this year to produce higher write-offs makes sense if you expect to be in the same or lower tax bracket next year.
Early Mortgage Payment: Accelerating the house payment that’s due in January will give you 13 months’ worth of deductible interest in the new year – also applicable to vacation homes.
State and Local Taxes: Prepaying state and local income and property taxes that are due early next year can reduce your federal income tax bill, because your total itemized deductions will be that much higher.
Charitable Donations: Prepaying charitable donations that you would otherwise make next year can reduce your federal income tax bill, because your total itemized deductions will be that much higher. Donations charged to credit cards before year-end will count as contributions.
Medical Expenses and Miscellaneous Deduction Items: Consider prepaying expenses that are subject to deduction limits based on your AGI. The two prime candidates are medical expenses and miscellaneous itemized deductions. Medical costs are deductible only to the extent they exceed 10{a020e451f1e19a6d99ba2e649ac8163efcb5b31603b09a197c9a69a64c070418} of AGI for most people. However, if you or your spouse will be 65 or older as of year-end, the deduction threshold is a more-manageable 7.5{a020e451f1e19a6d99ba2e649ac8163efcb5b31603b09a197c9a69a64c070418} of AGI.
Strategy:
Make Major Year-end Purchases and Deduct Sales Taxes
If you live in a state with low or no personal income taxes, consider making the choice to deduct state and local general sales taxes instead of state and local income taxes on your return. Most people who choose the sales tax option will use an IRS-provided table to calculate their allowable sales tax deduction. You can deduct actual sales taxes on a major purchase such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an aircraft, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle. So making a major purchase (or motor vehicle lease) between now and year-end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.
Strategy: Prepay College Tuition
If your AGI allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider prepaying college tuition bills that are not due until early next year if that would result in a bigger credit on this year’s Form 1040. Specifically, you can claim a credit based on prepaying tuition for academic periods that begin in January through March of next year.
Strategy: Give to Charity
Here are two possibilities:
Donate Appreciated Stock; Donate Cash: If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve held in a taxable brokerage firm account for over a year, consider donating them, instead of cash, to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.
If You’ve Reached Age 70 1/2: Donate from Your IRA: You can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA, if you’ll be 70 1/2 or older by year-end. 1. Start a business. If you don’t already have a business, consider starting one before December 31st. You could convert your real estate practice into an LLC and get deductions for business expenses. Plus you can get some relief from Alternative Mininum Tax (AMT)
Other Last minute Strategies to consider:
Check your AMT status. AMT is catching more and more individuals. Those who happen to have significant deductions – those living in a state with a relatively high personal income tax rate and high real estate taxes – are vulnerable. The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum.
Employ your children. Yes really! This is a tax deduction for your business, and it will keep everyone happy, you, the IRS and even your kids. Just make sure you stick to the rules: written job description, time-sheet records and pay in line with current market rates.
Settle on a rental property by December 31st. You’ll be entitled to depreciation deductions, plus you can incur rental property expenses such as utilities, repairs and insurance.
Accelerate Business expenses. You don’t need to invest in anything you don’t need, but you can prepay some regular expenses such as; rent, insurance and taxes. You can prepay for up to 3 months and take the deduction.
Life Changes Affect Your Taxes
Addressing the changed circumstances in your life has always been a large part of year-end tax planning. What you planned for at the beginning of the year may not be what you are faced with now. Changes in your employment status, family, investments, or retirement plans raise new tax issues:
• Self-employment, severance pay, sign-on bonuses, stock options, moving expenses, and COBRA health benefits, to name a few employment-related events, all present unique challenges.
• In your personal life, marriage, divorce, a larger family, and child care or eldercare expenses arising next year can impact your tax situation.
• Investments, too, generally benefit from year-end tax strategies. You can take steps to balance out gains and losses. You also should take a year-end tally of dividends and interest to make certain that are paying the correct estimated tax.
A special word about losses, especially as this difficult year draws to a close. Matching losses with gains is not necessarily a simple task in the tax law. Different rules apply to different losses. Losses can be ordinary losses, passive losses, at-risk losses, capital losses, hobby losses, casualty losses, gambling losses, or Code Sec. 1231 losses. Knowing the differences and acting before year-end to match them correctly can mean significant tax savings.
Planning for deductions and credits at year-end can also get complex but can be equally as rewarding. Timing and qualification rules create traps and opportunities to really build your wealth.
WHAT WBCPA WILL DO FOR YOU AS PART OF A
YEAR END TAX PLANNING SERVICE…
• For business owners, check that you have an EIN number, operating agreement, and a separate bank account. Record all the income and expenses related to the business on the business bank account. This is a huge audit item.
• For investment property that was foreclosed or sold as a short sale, we will consider the impact of the cancellation of debt income on your individual income taxes and calculate the loss of sale of investment property.
• For active real estate income, we will restructure your business to minimize the impact of self employment taxes and for significant real estate education expenses, we will register a business in order to minimize your audit exposure on deducting these expenses.
• If you have significant business expenses and already have a registered business, we will look at converting to a partnership to avoid an audit flag
• We will examine your tax filing requirements are for the states where your business is registered such as annual filing, personal property tax returns, etc. and if you own investment property, we will do a cost-segregation study in order to increase your depreciation expense.
• If you bought or sold property this year, we will examine the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible next year.
There are a lot of changes to your taxes to absorb. Let us work with you to figure out the best solution for your tax situation. Contact us for a FREE consultation at 1.888.502.3767
