With tax season fast approaching, many agency owners and managers want to make changes to save time, money, and stress. Tax planning is one of the most effective and efficient ways to do this.
However, determining whether an activity qualifies as a tax-planning strategy requires considering the facts and circumstances. A tax-planning approach may also impact the timing and character of income recognition.
Accelerate Your Income
Generally, year-end tax planning focuses on deferring income to a later year and accelerating deductions to minimize your overall tax burden. However, there are times when it is more appropriate to accelerate your income into this year to take advantage of the lower tax rates currently in effect.
Accelerating your income can be especially useful if you expect to be in a higher tax bracket next year due to a favorable filing status change, a divorce, or another factor. This strategy may also be beneficial if you are close to the threshold amount for the Additional Medicare Tax or Net Investment Income Tax.
In addition, accelerated income can be used to increase your charitable contribution limitation for the current year. This may be particularly helpful for higher-income taxpayers anticipating being subject to the increased top tax rate under President-elect’s proposed legislation.
Defer Income To A Later Year
Deferring income to a later year is a tax planning New York strategy that can help you save on current-year taxes. It can also be used to avoid the impact of capital losses on your taxable income.
Whether or not you defer income to a later year, consider other tax planning strategies. For instance, you can use a deductible interest expense election to capitalize certain expenses that would otherwise be deductible.
This strategy can be good if you expect to be in a lower tax bracket next year or anticipate a significant business reversal. It also can be helpful if you have substantial medical expenses. However, it would help if you always weighed the cost of deferring the deduction against the benefit of using it in a year when you’ll be in a lower tax bracket.
Donate To Nonprofits
Donating to nonprofits is a great way to support causes you care about. It feels good and motivates people to practice unselfish concern for others.
In addition to monetary donations, nonprofits appreciate in-kind contributions such as time and expertise. By providing in-kind donations, you can help alleviate some of the nonprofits’ stress while allowing them to use their funds more efficiently and effectively.
Donations to qualifying charities qualify for deductions from income taxes, reducing the amount of taxable income and potentially increasing your tax refund. To ensure your contributions are deductible, check the charity’s 501(c)(3) status with the IRS’ exempt organization search tool.
Set Up A Donor Advised Fund
Donor-advised funds are an increasingly popular way to give to charities you care about while maximizing tax deductions. They allow you to make an irrevocable donation of cash, securities, and other assets and then recommend grants from the fund over time.
These accounts can also be set up to accept non-cash gifts such as appreciated stock, real estate, and collectibles. These types of donations can be more difficult for charitable organizations to manage, so DAFs allow them to receive these non-cash gifts.
Donors should discuss setting up a donor-advised fund with their tax advisor to see how it might fit into their overall plan. In addition, some donors may want to consider taking advantage of a changing tax landscape to minimize their taxes.
Establish A Business Entity
If you’re considering starting a business, it’s essential to decide on the type of entity that best suits your needs. This affects everything from your tax burden to the paperwork you need to file.
For example, forming a sole proprietorship might be your best option if you’re a freelancer or consultant. You can use this structure as a “starter” until your business grows and generates more income.
Another common business entity is the limited liability company (LLC). This is a relatively new option that offers liability protection for its owners. The LLC also allows for flexibility in running the business and is relatively inexpensive to incorporate.