Timing, and the smart use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered.
So, too, sometimes fairly sophisticated like-kind exchange, installment sale or placed-in-service rules for business or investment properties come into play. Like-kind exchange or installment sale of property is used to defer the payment of a capital gain on the sale of property or other investments. The placed-in-service date is important for tax planning purposes at year end because optimally chosen placed-in-service dates can accelerate depreciation deductions and make available any additional deductions or tax credits.
In other situations, however, implementation of more basic concepts is just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payer, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered in due course.
Bunching strategies: Certain items are deductible only to the extent they exceed an adjusted gross income (AGI) floor; for example, aggregate miscellaneous itemized deductions are deductible only to the extent they exceed two percent of the taxpayer’s AGI. Thus, year-end and new-year tax planning might consider ways to bunch AGI sensitive expenditures in a single year, so that particular deductions exceed their applicable floors and the taxpayer’s total itemized deductions exceed the standard deduction.
Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice