For most people, dealing with their own
taxes is as much fun as going to the doctor for an annual checkup. Similarly, the only time taxpayers truly get involved is once
a year in early April as the filing deadline
looms. Unfortunately, by that time, there is
very little they can do to reduce their taxes
for the prior year.
Planning ahead often leads to the discovery
of otherwise overlooked opportunities that
may be used to improve your financial well-being. By considering specific tax-saving
strategies now, you may be able to reduce
your tax bill before it is too late.
While tax planning must be customized to
an individual’s particular circumstances,
there are several tactics that everyone should
consider as the year’s end approaches.
Smart Business learned from Brent
Saunier, CPA, tax manager with Tauber &
Balser, P.C., some fundamental tax-planning
techniques.
What are some of the tax-planning fundamentals
an individual should know?
Your tax bracket: A good way to begin
your planning is by estimating your 2007 and
2008 adjusted gross income (AGI). This simple step is essential because many tax breaks
are tied to or limited by your AGI. Knowing
your tax bracket allows you to better predict
the effects of certain tax-planning strategies.
Defer income: In potentially high-income
years, consider deferring some income. If
your employer will agree to defer payments
into 2008, those salary and bonus amounts
would not be taxed to you until 2008. If you
expect to be in a higher income tax bracket
next year, you may be better off accelerating
income into the current year.
Installment sales: An installment sale
allows you to defer capital gains on most
assets. You can defer your overall tax burden
by spreading the gain over several years as
you receive the proceeds.
Timing capital gains and losses:
Consider deferring the sale of appreciated
stock until January to postpone gain recognition. Likewise, sell depreciated stocks before
the end of the year to offset other gains you
may have incurred.
Bunching miscellaneous deductions:
Consider bunching miscellaneous deductions — investment expenses, job hunting
expenses, tax preparation and unreimbursed
business expenses — into a single year to
increase the amount that exceeds the 2 percent AGI limitation.
Accelerate deductions: A simple example of accelerating deductions is your state
tax deduction. Your state income tax payments are an itemized deduction against your
federal taxable income. If you make an estimated state tax payment before Dec. 31, you
can deduct it this year rather than next year.
The same approach could be taken in
regards to paying your real estate taxes prior
to the year’s end. Be sure to consider the
alternative minimum tax (AMT) before accelerating these deductions.
Retirement contributions: Consider contributing the maximum amount to retirement
arrangements — whether employer-sponsored or an IRA. The contribution limit for
traditional and Roth IRAs increases to $5,000
for 2008. A ‘catch-up’ provision permits an
additional contribution of up to $1,000 by
individuals who are at least age 50.
What are some of the tax-planning techniques
for businesses?
Consider business structure: The differences in tax treatments of different
entity structures may provide planning
opportunities. For example, to reduce the 2.9 percent Medicare tax, S corporation
shareholder-employees may want to maintain reasonable salaries and increase the distributions of company income.
Depreciation deductions: In lieu of
depreciation, business taxpayers can
expense up to $125,000 of the cost of equipment or other tangible personal property
placed in service during the year. Claiming an
all-at-once deduction may be preferable to
depreciating the asset(s) over time. The maximum amount will increase slightly to
$128,000 in 2008.
Maximize tax credits: Tax credits reduce
your business’s tax liability dollar-for-dollar.
Several tax credits that had expired at the
end of 2005 have been extended through
2007, including the empowerment zone and
the research and development credits. Don’t
forget to examine the state credits allowed in
your jurisdiction.
Accounts receivable: If your tax return is
prepared on the accrual method of accounting, you are paying tax on sales when they
are transacted, not when the cash is actually
collected. Analyze your accounts receivable
to determine if there are accounts that are
uncollectible. The write-off of uncollectible
accounts will prevent you from paying tax on
‘phantom’ income.
Cost segregation: Commercial property is
generally depreciable over a 39-year period
using the ‘straight line’ method. However,
certain components of a building may qualify
for significantly shorter depreciation periods
and an accelerated method of depreciation.
Keep this in mind if you are buying, building
or renovating a property.
These are only a few of the many techniques and considerations taxpayers should
contemplate when doing year-end tax planning. There are many other strategies and
techniques that may be employed to lower
your taxes. Year-end planning must be done
prior to Dec. 31. Once the year ends, you can
only plan for the next year.
BRENT SAUNIER, CPA, is a tax manager at Tauber & Balser,
P.C. with more than 10 years of experience in accounting operations and financial management. He has worked extensively in
industries such as distribution, heath care, manufacturing, professional services, retail service and trucking. Reach him at (404)
814-4960 or [email protected].