May we let you in on a secret? You know what they say about death and taxes? Well, only the part about death is true. If you act between now and New Year’s, you can save money on your taxes.
“A basic principle behind year-end tax planning is to defer income to next year and accelerate deductions into this year,” says Michael Steele, partner in the accounting firm Williams, Adley & Co. L.L.P. in Oakland, California. “That will reduce the taxable income you’ll have to report for 2000.”
Kevin Brown, founder, president, and CEO of Strategic Marketing Resources Inc., a direct marketing company in San Leandro, California, is in no hurry to bill his customers until the end of the year. By doing so, he can delay income until next year. If you’re self-employed or have a business on the side, don’t send out invoices until the end of December. Assuming you use the cash-basis method of accounting, in which income is reported when received and expenses when paid-as opposed to accrual-basis accounting, which reports income when earned and expenses when incurred-you won’t realize taxable income until the checks clear.
Similarly, cash-basis companies such as Brown’s need not aggressively pursue outstanding receivables. They can wait until 2001 to chase after overdue accounts.
There are some things you can do besides defer taxable income from one year to the next. For happier holidays, here are some other tax-saving tips.
THE SOONER THE BETTER
Even if you can’t shift much income into next year, you have control over your expenses. Paying your bills in December 2000 may yield a deduction in April 2001, while waiting until January 2001 to pay them can deprive you of a deduction.
Prepay estimated state and local income taxes due next January, as well as property taxes due early in 2000. In addition, if you send in your January mortgage payment before Christmas, the lender probably will receive it in time for you to get a 2000 deduction.
There may be a catch to such maneuvering, though. “If you’re going to be subject to the alternative minimum tax (AMT) in 2000, you won’t benefit from some deductions, such as state and local tax payments,” says Sheryl Rowling, a CPA and financial planner at Rowling, Dold & Associates in San Diego, “so you shouldn’t prepay them. That’s why year-end tax planning is so important. You’ll know what to expect, in terms of your income for the given year, and you’ll still have time to implement various strategies.” Alternative minimum tax is used by the IRS to ensure high-income individuals pay some minimum amount of tax regardless of deductions, credits, or exemptions (based on adjusted gross income).
Determining whether or not you’ll be subject to the AMT is no easy task, so it’s vital to sit down with your tax professional for an annual review. Fine-tune your itemized deductions. For example, you’re allowed to deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). At the end of the year, if you’re almost at, or