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.

Individual Taxes

  • Defer Income. Move to reduce taxes by deferring income to a future year, assuming you are not in Alternative Minimum Tax.
    • Ask your employer to defer paying your year-end bonus until after the first of the year.
    • Invest excess cash in Treasury Bills that don't mature until next year or in CDs that won't let you take out interest without a penalty until next year.
  • Accelerate income. Accelerate some income this year if you know that next year you will have significantly more income. The taxes you save may surpass the financial benefit you receive from deferring the tax payment for a year.
  • Retirement Plan. Contribute all you can to a retirement plan. Your contributions to qualified retirement plans and any earnings on those contributions generally won't be taxed until you begin receiving those funds.

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 year.

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. A checklist:
    • 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
Telephone: 760-632-5800