Tax planning is a term batted around frequently but unless you understand your goals for tax planning, it will be difficult to take the appropriate step in the right direction. Let’s be clear here. This is not about tax evasion (which is illegal). This is not about avoiding paying your fair share to live in this beautiful country. This is about playing by the rules to reduce, defer, or eliminate some of your tax liability.

First, what are your goals? Are they to decrease taxable income? Are they to reduce marginal tax rates? Are they to maximize tax credits? Are they to eliminate penalties?

Goal: Decrease taxable income
Possible options:

  • If you know this tax year will have a higher income (and higher marginal tax rate) than the next, then plan to pay your final estimated tax payment for the state (the one due on Jan 15 of the following year) in December so you can claim it in this tax year.
  • Take advantage of all of your travel, mileage/auto expense, meals and entertainment related to your business or your job if not reimbursed by your employer.
  • Push year-end billings and sales into the next year if you think next year’s tax rate will be lower. Or accelerate these items if you expect next year’s tax rate to be higher.
  • Similar to the above, accelerate payables into this year if you think next year’s tax rate will be lower than this year’s.
  • Push the sale of property/investments that will generate a capital gain into the next year if you expect a lower tax rate then. And depending on current expensing allowances, purchase equipment this year to take advantage of bonus depreciation to reduce taxable income.
  • For charitable donations, donate investments that show a large capital gain instead of the cash produced from selling. You’ll get the deduction at the appreciated price, without paying any capital gains.
  • As much as possible, increase your contributions to your 401(k). This will reduce your income today and although you will taxed on the income later (as with a traditional IRA), your tax rate will likely be lower at that point in your life. (Alternatively, consider investing in a Roth IRA if you think the tax-free growth is worth more than the immediate tax deduction.)

Goal: Reduce marginal tax rates
Possible options:

  • If you own a business, ensure you have set up the legal entity so that all facets of personal income from the business are the most tax advantageous depending on expected income level of the business.
  • If possible, receive income in a form that is subject to capital gains (hopefully long term) instead of ordinary income tax.
  • Gift assets (cash or investments) to your children.

Goal: Maximize tax credits
Possible options:

  • Maximize your contributions to tax-deferred retirement programs. The business will be able to receive a tax credit for the amount contributed.
  • On the individual level, take potential advantage of deductions for college expenses, adoption expenses, savings for retirement. Avoid early withdrawals of retirement accounts.

Goal: Eliminate penalties
Possible options:

  • Pay on time. Payments are due Apr 15, Jun 15, Sep 15, and Jan 15 (of the following year).
  • Verify the safe harbor rules to ensure you are not going to get penalized for underpaying.

These are just a few thoughts and tips on tax planning. It does not take AMT into account (which could impact some of the tips above). It also does not consider overall estate planning, which could include a goal of maximizing the amount of wealth that stays in the family, planning for retirement or funding education or that once-in-a-lifetime trip. So while the above is not a comprehensive list by any means, if a light bulb went off and you want to discuss specific goals, give us a call!