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Year End Tax Planning Strategies

As the end of the year approached, most of us were concentrating on the holidays and did not plan on thinking about taxes until close to April 15, 2005. However, in many circumstances now is the time to consider some possible planning strategies that can turn into real dollars when it is time to file those 1040’s. I have listed below six general year-end strategies. Please be aware that not everybody is eligible for these ideas, therefore I would suggest speaking to a tax expert before making any moves. These are simply ideas for you to think about and hopefully spawn some questions for your preparer.

Accelerate or defer income
If you expect to be in a higher tax bracket next year, accelerating income into the current year can save you taxes because you will be taxed at a lower rate. If you expect to be in a lower tax bracket next year, then the opposite approach—deferring income to the following year—can reduce your taxes. Even if your bracket will remain the same, deferring income to a later year generally will be advantageous.

Your gross income includes all forms of income received, such as from wages, salaries and tips; interest; dividends; profits or losses from a business; capital gains and losses ; rents, royalties, and income from partnerships, S corporations and trusts; unemployment compensation; alimony received; Social Security benefits; IRA and pension distributions; and refunds of state and local income taxes.

Maximize above-the-line deductions
You can take above-the-line deductions—the gross income adjustments that determine adjusted gross income (AGI)—in addition to the standard deduction or itemized deductions. Because AGI determines your eligibility for various deductions, exemptions and credits, this strategy can further reduce your taxes.

Possible adjustments include IRA, SEP, SIMPLE or Keogh plan contributions; alimony paid; moving expenses; one-half of self-employment tax; business expenses for the self-employed; self-employed health insurance; penalty on early withdrawal of savings; student loan interest; and some higher education expenses.

Maximize itemized deductions
Claiming itemized deductions will save you taxes if your total itemized deductions exceed the standard deduction. (For 2004, the standard deductions are $4,850 for single and married filing separately, $7,150 for head of household, and $9,700 for married filing jointly.) By bunching certain deductible expenses in one year, you may be able to exceed applicable floors.

Possible itemized deductions include interest expense; state and local income taxes and property taxes; charitable contributions; casualty and theft losses; gambling losses; and miscellaneous expenses, such as unreimbursed employee business expenses, tax preparation fees, investment fees and expenses, safe deposit rental charges, and expenses incurred to protect income or capital.

Claim every possible exemption
Similar to deductions, exemptions can reduce the amount of income you pay tax on, so the more exemptions you can claim, the lower your tax bill.

For 2004, you are allowed a $3,100 exemption each for yourself, your spouse, your dependent children and any additional dependents. Possible additional dependents include parents, nieces and nephews, and other relatives whom you may be supporting.

Make the most of tax credits
While adjustments, deductions and exemptions reduce the amount of income subject to tax, credits take dollars directly off your tax bill, so they are particularly valuable tax-saving tools.

Possible tax credits include those for parents (the Child, Adoption, and Child and Dependent Care credits and ones for students or parents of students (the Hope and Lifetime Learning credits).

Plan for the alternative minimum tax (AMT)
If you’re subject to the AMT, consider timing receipt of income and payment of deductible expenses to minimize liability. If you paid the AMT in a past year, you may be able to claim a credit, depending on which adjustments generated the AMT.

You will be subject to the AMT if your AMT liability exceeds your regular tax liability. AMT liability is determined by adding various tax adjustments back to your taxable income and deducting an exemption depending on filing status: $40,250 for single and head of household, $58,000 for married filing jointly and surviving spouses, and $29,000 for married filing separately. Rates are 26% on the first $175,000 of AMT income ($87,500 for married filing separately) and 28% for income over that amount.

Please visit our website at www.borlandcpa.com for further tax tips, articles and calculators.