Year-end tax planning and investment decision making may sometimes result in substantial tax savings. Year-end tax planning primarily concerns the timing and the method by which you report your income and claim your deductions and credits. The basic strategy for year-end planning is to time your recognition of income so that it will be taxed at a lower rate, and to time your deductible expenses so that they may be claimed in tax years when you are in a higher tax bracket

What should you know about income and deduction strategies?

As stated earlier, you want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket. In general, taxpayers have a certain amount of control over the timing of income and expenses. Below are a few ways to control the timing of income and expenses.

You can accelerate your income into this year by:

  • Collecting any debts you are owed
  • Taking distributions from your IRA or retirement plan if you will not
    incur an early withdrawal penalty
  • Collecting accounts receivable if you're self-employed and use the
    cash method of accounting
  • Arranging to receive dividends
  • Settling lawsuits, insurance claims, etc.
  • Selling any assets that would result in a capital gain
  • Redeeming any Series EE savings bonds (also called Patriot bonds) that you have elected to defer taxes on until they are redeemed
  • Convert a traditional IRA to a Roth IRA

You can postpone your income into the following year by:

  • Delaying the collection of any debts that you are owed
  • Deferring compensation
  • Deferring year-end bonuses
  • Delaying the exercise of incentive stock options (ISOs)

You can accelerate your deductions into this year by:

• Making next year's charitable contributions this year instead
• Prepaying deductible interest
• Paying estimated tax installments in December instead of January
• Accelerating capital losses
• Taking advantage of flexible spending accounts, Archer MSAs, and
cafeteria plans
• Making January's alimony payment in December
• Prepaying next spring's college costs in December (if it qualifies you for education tax credits)

You can postpone your deductions into the following year by:

• Postponing charitable gifts
• Paying December's deductible expenses on January 1
• Delaying the payment of deductible interest
• Scheduling nonemergency dental and doctor's visits for the following year
• Delaying the realization of deductible capital losses
• Setting up a tax-deferred annuity or retirement account
• Deferring the sale of capital gain property, or taking installment payments rather than a lump-sum payment
• Postponing receipt of distributions that are over the required minimum from retirement accounts
• Increasing your contributions to your company's 401(k) plan or other tax-deferred plans

Financial investments

• Pay attention to the changes in the capital gains tax rates for individuals and try to sell only assets held for more than 12 months.
• Consider selling stock if you have capital losses this year that you need to offset with capital gain income.
• If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain.

Personal residence and other real estate

• If you want to sell your principal residence, make sure you qualify to exclude all or part of the capital gain from the sale from federal income tax. If you meet the requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly). Generally, you can exclude the gain only if you used the home as your principal residence for at least two out of the five years preceding the sale.
• Consider structuring the sale of investment property as an installment sale in order to defer gains to later years.
• Maximize the tax benefits you derive from your second home by modifying your personal use of the property in accordance with applicable tax guidelines.

Retirement contributions
• Make the maximum deductible contribution to your IRA. Try to avoid premature IRA payouts to avoid the 10 percent early withdrawal penalty (unless you meet an exception). Contribute the full amount to a spousal IRA, if possible. If you meet all of the requirements, you may be able to deduct annual contributions of $5,000 to your traditional IRA and $5,000 to your spouse's IRA. You may be able to contribute and deduct more if you're at least age 50.
• Set up a retirement plan for yourself, if you are a self-employed taxpayer.
• Set up an IRA for each of your children who have earned income.
• Minimize the income tax on Social Security benefits by lowering your income below the applicable threshold.

Charitable donations

• Make a charitable donation (cash or even old clothes) before the end of the year. Remember to keep all of your receipts from the recipient charity for all donations.
• Use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.
• Use a credit card to make contributions in order to ensure that they can be deducted in the current year.

Itemized miscellaneous and medical expenses

• Take advantage of the adoption tax credit for any qualified adoption expenses you paid. In 2009, you may be able to claim up to $12,150 per eligible child (including children with special needs) as a tax credit. The
credit begins to phase out once your modified AGI exceeds $182,180,
and it's completely eliminated when your modified AGI reaches $222,180.
• Maximize the use of itemized miscellaneous expenses and/or medical expenses by bunching such expenses in the same year, to the extent possible, in order to meet the threshold percentage of your AGI.
• Make sure that you have applied for Social Security numbers for all new dependents. Otherwise, the dependency exemption on your income tax return may be disallowed.

Contact your Montello Wealth Financial Consultant

Your Montello Wealth Financial Consultant can assist you in developing successful year-end tax planning strategies.

Contact us  for more information on Montello Wealth’s' year-end tax planning strategies.