As the year comes to a close, it is important to look at the options that are still available to help you reduce your tax liability. This article will help give you a few ideas about tax planning strategies you can implement before the end of the year.
One of the simplest ways to reduce your liability is to ask your employer to increase your tax withholding amounts. Doing this will allow you to pay off your liability in a small amount each paycheck, instead of getting a nasty surprise when you file your taxes.
However, if you are getting extremely large refunds each year, you can reduce the amount you are having withheld from your paycheck. Please note that if you choose to do this your refund will be reduced, but you will get more from your paycheck throughout the year.
Alternative Minimum Tax
Originally, Alternative Minimum Tax (AMT) was used to prevent the wealthy from using loopholes to avoid making tax payments. But now it reaches into the middle class. AMT is governed by different rules than those used by the regular income tax system. AMT rules disallow certain deductions and exemptions and they treat items such as incentive stock options differently.
An AMT may be triggered by several different things. These include but are not limited to: large numbers of personal exemptions; large deductions for state, local, personal property, and real estate taxes; home equity loan interest when financing is not used to buy, build, or improve your home; exercising incentive stock options; and large amounts of miscellaneous itemized deductions.
If you think that you may be subject to AMT your tax planning approach will have to be very different than normal since some of the most basic tax planning strategies can have a negative effect under AMT rules. You may also want to seriously consider meeting with a tax professional who can help you navigate the waters and avoid a taxation disaster.
The time that you choose to delay or accelerate income and deductions can have a large bearing on what you owe at the end of the year. An example of this would be delaying income from this year to the next if you are expecting to be in a lower tax bracket next year.
Delaying your income may be able to help you to defer year-end bonuses; defer the sale of capital gain property (or take installments instead of a lump sum); and postpone the receipt of distributions from retirement accounts (this would not apply to required minimum distributions).
Another timing option you have at your disposal is to accelerate your deductions so that you are able to take advantage of their tax liability reducing powers this year. What type of deductions could you accelerate? You may want to pay any medical expenses in December, prepay deductible interests, make alimony payments early, or make next year’s contributions this year.
Making a donation to charity is a fulfilling and easy way to increase the amount that you can deduct from your taxes. You may give up to $14,000 to as many charities as you want without incurring any federal gift tax consequences (the amount is doubled for married couples).
You may want to take advantage of contributing to an employer-sponsored retirement plan. The money that you put it will be taxed when you withdraw during retirement, instead of now. You can also contribute to a Traditional IRA, which has the same effect as contributing to an employer-sponsored plan.
End of the year tax planning is a vital component for financial success. Do not leave yours to chance. Take the time to meet with a qualified tax professional that can help you to plan correctly and effectively, so as to minimize your tax liability.