There’s not much of the year left and many people are scrambling to save whatever they can on their taxes. Yes, it’s quite possible to save a ton of money before the year is out and start the new year fresh ready to focus on wealth building, now more than ever is important to attend to your year end tax planning.
Here are some strategies you can use to save those last minute bucks.
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).
2. 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.
3. 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.
4. 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.
5. 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.
6. Deduct payments to yourself through retirement plans. Make the maximum deductible contributions to retirement plans before the year is out. Once this is done, you can significantly extend the period for securing deductions. You could also open a self-employment retirement plan such as a qualified plan and make tax-deductible contributions.
7. Give and deduct business gifts. There’s no better time than the holidays to give gifts to tenants, associates, clients, and referrals. Each gift deduction is limited to $25 per person.
8. Buy some books! Invest in your education and buy some business-related books, deduct them in December, and pay for them next year.
9. Pre-paying certain expenses, such as real estate taxes or mortgage interest, does not necessarily translate into a larger deduction this year. But Paying a spring college tuition bill in late December instead of early January, however, can impact whether you maximize the benefit of the new American Opportunity Tax Credit..
10. Year-end charitable giving generally has always been a smart way to reduce current year taxes but strict timing rules and revised substantiation requirements for property donations cannot be overlooked.
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 this 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 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 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, an operating agreement, and a separate bank account. Record all the income and expenses related to the business in the business bank account. This is a huge audit item for this year.
• 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 by 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 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.
Wealth Building CPA is offering a DIY Year End Tax Planning Software Kit for just $97. Take control of your finances! Click HERE to get more information.
