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It’s That Time of Year - Year End Tax Planning
Tax and Financial News
October 2007
It’s That Time of Year - Year End Tax Planning
September is over and summer is just a memory. Now we enter autumn, a particularly beautiful, sometimes dreary, time of year that brings its own special feeling. With tree leaves moving from their summertime green to bright oranges, reds & yellows just before they fall and the weather turning cooler….well, the truth is that between Mother Nature’s autumn show, and Halloween ushering in the holiday season, there is much to distract us. While those distractions can be wonderful, don’t let them keep you from the business of minimizing what you pay to Uncle Sam.
The next three months mark the last quarter of the year - and your last chance to take steps to minimize your tax liability for 2007. Use the time wisely. This article is intended to remind you of some of the things you can do the rest of 2007 to reduce your tax bill.
Income
Of course, the way you reduce your income tax burden is to reduce your taxable income. It should come as no surprise then that decreasing your gross income will aid you in achieving that goal.
Delaying billing at year-end is a classic way for cash basis taxpayers to reduce taxable income. People who run businesses that extend credit can delay sending the last billing of 2007 until it’s virtually certain your customer(s) will not be able to get the payment to you by December 31.
If you use this technique, remember that your customers may need tax deductions of their own. Try and time your billings to allow them to write a last minute check and put it into the mail to you on December 31. That way, both you and your customer(s) are happy. One thing you should not do is instruct a customer to pay in 2008 when they otherwise would have paid in 2007. In certain circumstances, if you have the ability to receive payment but do not, the income may be includible in 2007.
Selling assets at a loss may be another possibility for you. Many taxpayers have racked up some healthy gains from stock market and mutual fund activities this year. Offsetting realized gains by selling stocks with a loss in them is a great way to reduce taxable income - and assets with a loss that is permanent are prime candidates. Remember, the asset you sell need not be a stock if you are trying to cover a gain on a stock sale. Any capital loss can offset your current year capital gains.
Beware of wash sale rules. If you sell a stock and then repurchase it within 30 days, the tax code will treat the sale as if it did not occur, negating the loss.
Be extremely careful when purchasing mutual funds in the latter part of the year. Mutual funds typically make distributions of capital gains earned throughout the year in December. Since the assets created by the capital gains are held in the mutual until year end, they increase the net assets of the fund. When you pay the net asset value at the time of purchase, you are essentially buying and paying tax on someone else’s capital gain income. Look very carefully at any mutual funds you are thinking of buying to avoid this costly error.
Do you have some cash that needs to remain relatively liquid, but needs to be invested in an interest-bearing account? If so, consider putting the cash in a short-term certificate of deposit that does not pay interest until 2008. You put off the taxable income while still keeping the money available on short notice.
If you are negotiating the sale of an asset, and the sale must occur in 2007, consider selling the property on an installment basis. By taking only a portion of the sales price in 2007, and the remainder in 2008, you can defer payment of the tax for a full year.
Before we leave the subject of income, remember: there are times that you might actually want to accelerate income. Say you took a huge business loss in 2007 but, as a result, expect 2008 to be a much better year. If your 2008 plans include taking significant gains on asset sales, or receiving money from a significant sale, you may want to ‘zero out’ the business loss by accelerating what would otherwise be 2008 income. It is possible that, by doing so, you will keep yourself in lower tax brackets in both years, which will reduce your tax bill.
Expenses
If you calculate income on a cash basis and operate as either a sole proprietor or as a pass-through entity (partnership, S Corporation, trust), consider paying all your bills before December 31, 2007. Cash basis taxpayers take a deduction only when the expense is paid. You can do so by check or, if necessary, credit card.
One very important point to bear in mind is that you don’t want to incur an expense just to get a deduction. At the very best, an expenditure of $100 will only save you $35 in federal tax. You will still be out-of-pocket by $65. Incur only those expenses that you would have paid under normal circumstances.
Don’t forget the option to expense certain fixed assets that you buy and place in service before the end of 2007. Again, the purchased equipment should be something you planned to acquire anyway and buying it in 2007 is simply accelerating a needed purchase. Cash basis taxpayers must either pay the full purchase price in 2007 or borrow money from an entity that is not the seller. If you let the seller finance your purchase, you will only be able to expense or depreciate the equipment as you make payments on the loan. The maximum amount you can expense in 2007 is $112,000.
Is now the time to set up a retirement plan for your employees? If you establish a retirement plan in 2007, any employer contributions will be due just before you file your tax return. Think about that! You get the deduction in 2007, but the cash goes out in 2008.
From a personal standpoint, don’t forget itemized deductions. Now is the time to estimate your total itemized deductions. If it does not appear that your deductions will exceed your standard deduction (amount the government assumes you will spend and which is allowed as a deduction from adjusted gross income), consider holding off on incurring any more itemized deductions to the extent you can. Paying in 2008 may allow you to “bunch” deductions. This is a technique where you combine two years’ deductions into one year, making them eligible for use as itemized deductions in one of those years. The savings can be substantial.
Conclusion
This has been a short, fast trip down ‘Tax Planning Lane’. It’s not an exhaustive list of your options because a proper evaluation of your options requires that all facts about your tax situation are known. Give us a call, or drop by, and let’s discuss your particular circumstances. We can help you minimize your tax bite for 2007.
Happy Halloween!
The next three months mark the last quarter of the year - and your last chance to take steps to minimize your tax liability for 2007. Use the time wisely. This article is intended to remind you of some of the things you can do the rest of 2007 to reduce your tax bill.
Income
Of course, the way you reduce your income tax burden is to reduce your taxable income. It should come as no surprise then that decreasing your gross income will aid you in achieving that goal.
Delaying billing at year-end is a classic way for cash basis taxpayers to reduce taxable income. People who run businesses that extend credit can delay sending the last billing of 2007 until it’s virtually certain your customer(s) will not be able to get the payment to you by December 31.
If you use this technique, remember that your customers may need tax deductions of their own. Try and time your billings to allow them to write a last minute check and put it into the mail to you on December 31. That way, both you and your customer(s) are happy. One thing you should not do is instruct a customer to pay in 2008 when they otherwise would have paid in 2007. In certain circumstances, if you have the ability to receive payment but do not, the income may be includible in 2007.
Selling assets at a loss may be another possibility for you. Many taxpayers have racked up some healthy gains from stock market and mutual fund activities this year. Offsetting realized gains by selling stocks with a loss in them is a great way to reduce taxable income - and assets with a loss that is permanent are prime candidates. Remember, the asset you sell need not be a stock if you are trying to cover a gain on a stock sale. Any capital loss can offset your current year capital gains.
Beware of wash sale rules. If you sell a stock and then repurchase it within 30 days, the tax code will treat the sale as if it did not occur, negating the loss.
Be extremely careful when purchasing mutual funds in the latter part of the year. Mutual funds typically make distributions of capital gains earned throughout the year in December. Since the assets created by the capital gains are held in the mutual until year end, they increase the net assets of the fund. When you pay the net asset value at the time of purchase, you are essentially buying and paying tax on someone else’s capital gain income. Look very carefully at any mutual funds you are thinking of buying to avoid this costly error.
Do you have some cash that needs to remain relatively liquid, but needs to be invested in an interest-bearing account? If so, consider putting the cash in a short-term certificate of deposit that does not pay interest until 2008. You put off the taxable income while still keeping the money available on short notice.
If you are negotiating the sale of an asset, and the sale must occur in 2007, consider selling the property on an installment basis. By taking only a portion of the sales price in 2007, and the remainder in 2008, you can defer payment of the tax for a full year.
Before we leave the subject of income, remember: there are times that you might actually want to accelerate income. Say you took a huge business loss in 2007 but, as a result, expect 2008 to be a much better year. If your 2008 plans include taking significant gains on asset sales, or receiving money from a significant sale, you may want to ‘zero out’ the business loss by accelerating what would otherwise be 2008 income. It is possible that, by doing so, you will keep yourself in lower tax brackets in both years, which will reduce your tax bill.
Expenses
If you calculate income on a cash basis and operate as either a sole proprietor or as a pass-through entity (partnership, S Corporation, trust), consider paying all your bills before December 31, 2007. Cash basis taxpayers take a deduction only when the expense is paid. You can do so by check or, if necessary, credit card.
One very important point to bear in mind is that you don’t want to incur an expense just to get a deduction. At the very best, an expenditure of $100 will only save you $35 in federal tax. You will still be out-of-pocket by $65. Incur only those expenses that you would have paid under normal circumstances.
Don’t forget the option to expense certain fixed assets that you buy and place in service before the end of 2007. Again, the purchased equipment should be something you planned to acquire anyway and buying it in 2007 is simply accelerating a needed purchase. Cash basis taxpayers must either pay the full purchase price in 2007 or borrow money from an entity that is not the seller. If you let the seller finance your purchase, you will only be able to expense or depreciate the equipment as you make payments on the loan. The maximum amount you can expense in 2007 is $112,000.
Is now the time to set up a retirement plan for your employees? If you establish a retirement plan in 2007, any employer contributions will be due just before you file your tax return. Think about that! You get the deduction in 2007, but the cash goes out in 2008.
From a personal standpoint, don’t forget itemized deductions. Now is the time to estimate your total itemized deductions. If it does not appear that your deductions will exceed your standard deduction (amount the government assumes you will spend and which is allowed as a deduction from adjusted gross income), consider holding off on incurring any more itemized deductions to the extent you can. Paying in 2008 may allow you to “bunch” deductions. This is a technique where you combine two years’ deductions into one year, making them eligible for use as itemized deductions in one of those years. The savings can be substantial.
Conclusion
This has been a short, fast trip down ‘Tax Planning Lane’. It’s not an exhaustive list of your options because a proper evaluation of your options requires that all facts about your tax situation are known. Give us a call, or drop by, and let’s discuss your particular circumstances. We can help you minimize your tax bite for 2007.
Happy Halloween!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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