It is always better to adopt a strategy to reduce your taxes as early in the year as possible. But, even if time gets away from you, there are some year-end steps you can take to reduce your tax liability. Remember in 2013 tax rates are scheduled to increase, certain deductions and credits will expire, meaning everyone will have a higher tax burden.
Here are some last-minute tax planning tools and strategies to consider:
* Review income and deductions. It's all in the timing! The most fundamental year-end tax move is to adjust the timing of your income and/or deductions. If your income is high, try to defer the receipt of any more income until after the end of the year. If you're close to the itemized deduction threshold, accelerate payments of deductible expenses.
* Postponement of income. If you're due a bonus, see if your employer will hold off writing the check until January. Of course, he will want the deduction currently, but it does not hurt to ask. If you are self-employed and own a cash basis business, wait until the end of December to send your December billings. But, remember you can't defer taxes by simply not putting a check in the bank. If you have the unrestricted right to the money, its income in the current year it's available - whether or not you choose to deposit the funds.
* Bunch your income. Some taxpayers find they have almost enough deductions to exceed the standard deduction. If you are in that situation, try and bunch payments into one year to take advantage of itemizing. Then the next year use the standard deduction, and then bunch your payments again the following year. This way you will be able to take advantage of being able to itemize every other year.
* Pay deductible expenses before Dec. 31. You can also pay property taxes early, make an extra mortgage payment (the interest portion is deductible), pay your tax preparer for your year-end tax planning meetings, or opt to have dental work (braces for the kids) or elective surgery before year end. Keep in mind that the IRS does not allow a deduction for payments made before the services are performed. But, putting it on a credit card is a legitimate way to take the deduction.
* Be charitable. You can make cash contributions or charge them on your credit card and take a deduction in the current year. If you give appreciated property to a charity, you will get to deduct the full market value. You may need an appraisal to determine what the value is of some property.
* Contribute to a deductible IRA if you qualify. You have until the April tax filing deadline to open up an IRA and make a deductible contribution for the prior year.
* Contribute to your company's 401(k). If you are eligible for a 401(k) at your place of work, make as large of contribution as you are allowed to make. If your employer matches some or all of your contribution, that is just an added benefit.
* Set up a Keogh plan before Dec. 31. If you are self-employed and you want to make a contribution to a Keogh plan, the plan must be adopted before year-end, even though you have until the April tax filing deadline (or later if you filed for an extension timely) to make a deductible contribution for the previous year.
* Conversion of a regular IRA to a Roth IRA. If your income is down in 2012 this might be the time to convert that regular IRA you have into a Roth IRA. Since you pay taxes currently on the conversion, the lower income would allow you to pay a lower tax.
* Adjust withholding. Withheld taxes are considered paid in equal amounts throughout the year regardless of when the tax is withheld. If you are concerned about having an underpayment penalty a year-end adjustment could help you avoid that penalty.
* Consider your marital status. Though this is touchy subject, if you are planning a wedding or divorce, be aware that your marital status as of Dec. 31 determines your tax status for the whole year. Changing the dates of a year-end event may save you taxes.
* Offset capital gains. Review your investment portfolio with your financial advisor to determine whether you should sell some losers before year-end in order to offset capital gains you have already realized. Capital losses are first netted with capital gains and then are deductible against ordinary income (limited to $3,000 a year).
* Plan for losses. Ensure you have adequate tax basis and at-risk basis to claim losses generated by flow-through entities, where you expect a loss for the year. Be sure to have sufficient basis to enable you to take the loss on your tax return. Remember, signing a personal guarantee on a bank loan is not considered part of your basis in the stock.
* Bonus depreciation and Section 179. If you are considering buying new equipment, relatively soon, buy it now and save taxes using bonus depreciation. Maximum bonus is 50 percent and maximum Section 179 is $139,000. We are not sure if it will be around in 2013 and later years. For 2012 a generous first-year depreciation is still available for vehicles subject to "luxury auto" rules.
* The 3.8 percent Medicare surtax. The 3.8 percent surtax comes into play in 2013. Since passive income is investment income for purposes of the surtax, you will need to keep eye on how your activities are classified. This will definitely affect your capital gain situation for 2013. If you are planning an installment sale for 2012, you might want to consider electing out it and saving the 3.8 percent surtax.
* Gifts. As we know real property has drastically decreased over the past few years. Now would be the time to look at gifting interest in your properties to your children. Thus saving on estate taxes down the road.
* Look before you leap. A word of caution about year-end tax-cutting measures: Do not rush into transactions which you hope will reduce your tax bill only to find out you have created other problems. Do not enter into transactions solely for the tax benefits. All investments should be economically sound. There are those who will sell you so-called "tax" solutions. Analyze such options carefully and make sure to discuss with your tax and financial advisors.
Remember, with the numerous tax law changes it is more important than ever to work closely with your tax and financial advisors.
Jerry Jones is a certified public account in Reno who specializes in tax planning. Contact him at jerry@jerryjonescpa.com or 775-828-0767.
