For many of our tax clients, especially those who own a business, year-end tax planning can pay handsome dividends when the tax return is completed early the next year. The refrain I cringe at hearing or using when it is time to prepare the annual income tax returns is “it would have been good if we had done . . .” These days, this phrase seems to only occur, for the most part, when I am meeting with a new client for the first time during tax filing season and didn’t have a chance to effectively plan with them during the previous tax year. The purpose of year-end tax planning is to project the tax liability for the year and then identify opportunities to reduce or eliminate that tax burden that can be executed before the year is over.
A fair number of my tax clients are hesitant to schedule a tax planning appointment for the first time as they are unsure what benefit the meeting and projection will provide and they try to weigh the unknown benefit against our fee for the tax planning and analysis. Overwhelmingly, those clients who do schedule an appointment don’t seem to have hesitation to schedule the appointment the next year. This is because they have seen the benefit and savings they experienced by having done the analysis and acting on our recommendations.
Generally, the focus of year-end tax planning is to defer the recognition of revenue into the following year and to expedite the recognition of expenses into the current year, thus reducing the net income of the entity which, in turn, reduces the taxable income on the individual 1040 tax return. Therefore, if there are opportunities to delay the receipt of payment from customers near year-end until early the following year, we recommend doing so. The trick here is that those customers may be doing tax planning of their own and want to pay you before year-end so that they can deduct that expense for their purposes in the current year. Expediting the payment of expenses into the current year is an area where we usually have more control. We often recommend making payment for goods or services in December when those expenses would normally be made in January of the next year.
Another avenue of tax savings available is to make contributions to qualified plans such as 401(k), 403(b), 457(b), and SIMPLE IRA plans by year-end. Other plans such as traditional IRAs or simplified employee pension IRAs (SEP IRAs) can be funded for the current year up until the April 15th initial filing deadline the following year. Contributing to a retirement fund kills two birds with one stone in that you reduce your tax burden and fund your retirement at the same time.
If a client has recognized substantial capital gain income in the current year, we often can identify other capital assets that represent unrealized losses and divest of those assets before year end to offset the capital gains generated elsewhere which reduces net taxable income.
Lastly, if a client has desires to make contributions to a church or charity, they can accomplish two purposes once again by assisting the charity and reducing their tax liability as long as the contribution is made prior to year-end. In Arizona, there are several available state tax credits that reduce a taxpayer’s tax liability dollar for dollar. The added benefit here is that the taxpayer enjoys the credit on the Arizona tax return and can also deduct the contribution on the federal tax return. In essence, the taxpayer is redirecting the tax liability they would have paid to the state government anyway to the qualified charity or school of their choice. Most of these Arizona credits must be funded by year-end but one can be funded up until the April filing deadline the next year.
Now is the time to perform year-end tax projections and planning and we are scheduling appointments with our clients starting next week through November. If you are a current client or a potential client and would like to schedule an appointment to discuss year-end tax planning, please contact us.