Thrifty Thinking: Year-End Tax Tips

As we move into the final months of the year… now is the perfect time to review year-end tax planning to reduce taxes for this year and position yourself of next year’s taxes for individuals or small businesses. The California Society of CPAs suggest the following strategies and other concepts that can be discussed in a one-on-one interview to meet your needs related to this topic:

Strategy 1: Review last year’s tax filing.

Review last year's tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you'll need to address while there's still time.

Strategy 2. Look at withholding.

If you project that you'll owe a substantial amount when you file this year's income tax return, ask your employer to increase your federal income tax withholding amounts. If you have both wage and consulting income and are making estimated tax payments, there's an added benefit to doing this: Even though the additional withholding may need to come from your last few paychecks, it's generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty due to underwithholding. Of course, if you've significantly overpaid your taxes and estimate you'll be receiving a large refund, you can reduce your withholding accordingly, putting money back in your pocket this year instead of waiting for your refund check to come next year.

Strategy 3. Delay or accelerate income and deductions.

The last few months of the year may be the time to consider delaying or accelerating income and deductions, taking into consideration the impact on both this year's taxes and next. If you expect to be in a different tax bracket next year, doing so may help you minimize your tax liability. For instance, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead. At the same time, you may want to accelerate your deductions in order to pay less tax this year.

To delay income to the following year, 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 into this year:

• Consider paying medical expenses in December rather than January, if doing so 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

Strategy 4. Consider charity deductions.

If you itemize your deductions, consider donating money or property to charity before the end of the current tax year in order to increase the amount you can deduct on your taxes. As an aside, now is also a good time to consider making non-charitable gifts. Our CPA can discuss the types of gifts you can provide and the limits you can claim this year.

Strategy 5. Consider retirement contributions.

To reduce your taxable income this year, consider maximizing your contributions to an employer-sponsored retirement plan such as a 401(k). You won't be taxed on the contributions you make now, and you may be in a lower tax bracket when you do eventually withdraw the funds and report the income. If you qualify, you might also consider making either a tax-deductible contribution to a traditional IRA or an after-tax contribution to a Roth IRA. In the first instance, a current income tax deduction effectively defers income--and its taxation--to future years; in the second, while there's no current tax deduction allowed, qualifying distributions you take later will be tax free. You'll generally have until the due date of your federal income tax return to make these contributions.

Strategy 6. Do additional research.

The California Society of CPAs (www.CALCPA.org) has created a free Web site of articles, tools and resources to help consumers. These resources can be accessed by going to: “Dollars and Sense.”