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Year-End Planning Can Take the Bite Out of Future Tax Bills


As the close of the year approaches, many of us are likely too preoccupied with holiday plans to think about taxes. But if you resolve to do some legwork now, you may find a simplified New Year to be among the greatest gifts you receive.

Opportunities for minimizing tax liabilities
Gather your prior year's tax return, as well as your current paystubs and account statements. This will allow you to make some projections regarding your tax bill. If you're in a position similar to last year, you can expect a similar outcome; if things have changed, you may need to revise your potential liabilities. Then you can address the following:
  1. Are you withholding the right amount?
    • If you anticipate owing taxes, you can:
      • Ask your employer to increase your federal income tax withholding amount.
    • If you anticipate a large refund, you can:
      • Ask your employer to decrease your withholding amount so you can receive your money now rather than waiting for a refund check.

  2. Will you be subject to the alternative minimum tax (AMT)? The following are possible triggers:
    • Large numbers of personal exemptions
    • Large deductible medical expenses
    • Large deductions for state, local, personal property, and real estate taxes
    • Home equity loan interest where the financing isn't used to buy, build, or improve your home
    • Exercising incentive stock options
    • Large amounts of miscellaneous itemized deductions, such as unreimbursed employee business expenses

    When you project your taxes, calculate your regular income tax on Form 1040 and your potential AMT liability using Form 6251. If you are subject to AMT, you may need a different planning strategy and should consult a tax professional.

  3. Should you change the timing of your income and deductions? If you expect to be in a different tax bracket next year, you may benefit from accelerating or delaying your income and/or deductions. For example, if you expect to be in a lower tax bracket, consider postponing income from this year to next so you will pay tax on it next year instead. You also may want to accelerate your deductions to pay less tax this year.

    To delay income, you might be able to:
    • Defer compensation
    • Defer year-end bonuses
    • Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)
    • Postpone receipt of distributions (other than required minimum distributions) from retirement accounts

    To accelerate deductions:
    • Pay medical expenses in December rather than January, if it will allow you to qualify for the medical expense deduction
    • Prepay deductible interest
    • Make alimony payments early
    • Make next year's charitable contributions this year

  4. Have you considered gifts that give back—to you? Consider donating to a charity before the end of the current tax year to increase the amount you can deduct on your taxes. Also consider noncharitable gifts; in 2009 and 2010, you can give up to $13,000 ($26,000 for married couples) to as many individuals as you choose without incurring federal gift taxes.

  5. Can you save by maximizing contributions to retirement savings vehicles? You may be eligible to make tax-deductible contributions to an IRA, or you can contribute after-tax dollars to a Roth IRA (qualified distributions will be tax-free). If you contribute to an employer plan, make the maximum pretax contribution.

  6. Are your assets protected? Be sure to review your estate plan and account for any changes in your financial life, circumstances, or tax laws.
Special considerations for business owners
Business owners have other tax liabilities to consider. Be sure to consult a professional for assistance with your situation.
  1. Business structure. Your business structure (e.g., C corporation, limited liability corporation (LLC)) affects the deductions and credits you may be eligible for. It can also impact your ability to finance the business, as well as determine available exit strategies. Be sure to assess the impact of state and local taxes where your company does business.

  2. Corporate employee-shareholders. If you own and work in the corporation, consider employment taxes in your salary structure. Medicare tax, in particular, is tricky because it’s not capped and will be levied against all income received as salary. Look at your salary and company income distribution for opportunities to reduce your taxes. But keep in mind that the IRS expects you to take a reasonable salary, so you’ll want to consult a tax professional.

  3. Leverage your gift tax exclusion with your business. You may be able to gift ownership interests that are eligible for valuation discounts. Structures such as family limited partnerships (FLPs) and LLCs can also provide valuation discounts when interests are transferred.
It’s not too late to take some of the bite out of your annual tax bill. With a bit of effort and some professional assistance, you can pave the way for happier tax years to come.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situation.

© 2009 Commonwealth Financial Network