They say timing is everything. And, when it comes to year-end tax planning, this expression certainly holds true for income and expenses.
Know the basics
When you don’t expect to be subject to the alternative minimum tax this year or next, deferring income to next year and accelerating deductible expenses into the current year typically is wise. Why? Because it will defer tax, which is usually beneficial.
But when you expect to be in a higher tax bracket next year — or you expect tax rates to go up — the opposite approach may be beneficial: Accelerating income will allow more income to be taxed at your current year’s lower rate. And deferring expenses will make the deductions more valuable, because deductions save more tax when you’re subject to a higher tax rate.
Also, don’t forget to take into account the income-based itemized deduction reduction when considering timing strategies.
Identify the items
As you undertake effective timing, identify items that you may be able to control. Controllable income items typically include bonuses and consulting or other self-employment income. For, example, if you own a cash-basis business, you might send out December invoices early (to receive income in 2016) or late (to receive it in 2017).
Potentially controllable expenses usually include:
- Business expenditures and certain retirement plan contributions, if self-employed,
- State and local income taxes,
- Property taxes, and
- Charitable contributions.
Bear in mind that, generally, prepaid expenses can be deducted only in the year to which they apply.
Pick your partner
Timing is easier with a good dance partner. We can help you identify your controllable items and decide whether to defer or accelerate.