Time is of the essence when planning your tax strategy.
The sooner you can begin planning for next year's taxes, the more
successful you will be. We offer the following tips for lowering
your federal income taxes. Please keep in mind that everyone's
tax situation is different. These tips may or may not be appropriate
for your specific circumstances. Before implementing any of these
suggestions, please consult a tax professional.
Help for Investors
- Security Sales. Get the tax treatment you want
on security sales. Pick the most tax-effective method for computing
your mutual fund basis. Do this before the transaction occurs.
There are several allowable methods.
- Balance Gains and Losses.
- Postpone taking gains on appreciated assets (investments,
etc.) until the more-than-one year holding period for long-term
gains treatment has passed. Short-term gains are taxable at
your ordinary tax rate.
- Realize capital gains this year and pay tax at up to the 20% federal rate (plus net investment income tax and state tax, if applicable), while deferring higher-taxed ordinary income until next year. This strategy will be most effective if you expect to be in a lower tax bracket next year.
- Carefully time capital losses. Capital losses are fully
deductible against capital gains, but any capital losses in
excess of capital gains may offset only up to $3,000 of ordinary
income. Excess losses may be carried forward to the next tax
Business Owners and Professionals
Personal/Corporate. Look at both
your personal and corporate tax situations. Distributions of
corporate earnings and profits are taxable to C corporate shareholders
as dividend income and are not deductible by the company. In
effect, the income is taxed twice -- once to the corporate and
once to the shareholder. You may find it to your advantage to
avoid dividend treatment by paying "reasonable" compensation
to yourself and other shareholder-employees.
- Time income to lower taxes. If you expect your pass-through business income to push you into in a substantially higher tax bracket next year, you may want to accelerate the business income into the current year. If not, deferring income is probably the way to go.
- Depreciate or expense business assets. Consider electing bonus depreciation or expensing assets via IRC Section 179 to accelerate the deductions allowed for business assets in the current year, instead of depreciating assets over time.
- Business Losses. Use business losses to your advantage.
- Business bad debts
- Inventory losses
- Capital losses
- Losses on the sale of business assets
- Net operating losses
These are just a few things to consider when planning your tax
strategy. For a more complete pamphlet on tax tips, please e-mail
us. As always, consult a tax professional to find out what tax strategies
are appropriate for your situation.
Contact us for our yearly tax planning letter for more information.
McDonough and Associates, CPA