Year –End Tax Planning Tips
by David L. Bateman, CPA
1. If a business is a cash basis taxpayer, then it should pay open bills prior to year end in order to take a tax deduction in the current taxable year.
2. If a cash basis taxpayer, then postpone collection of revenue until after the beginning of the tax year. This will defer recognition of income until the following taxable year.
3. For businesses on the cash basis and individuals, pay state estimated tax payments prior to year end. This will allow you to take the tax deduction in the current tax year.
4. If you have capital losses during the year on stocks or mutual funds and you have unrealized capital gains, then consider selling stocks or mutual funds at a gain prior to year end to absorb the capital loss offset. Capital losses are limited to $3,000 per year in excess of capital gains. If possible, the most optimal thing to do is to sell stocks so that you end up with a net loss of $3,000. This is assuming that you have losses. Obviously, it is in your best interest to have gains, but if you have losses from stocks, it behooves you to try to maximize the tax benefit.
5. For all businesses, it is important to get bookkeeping up to date through the end of November so that you will only need to update one month of accounting activity at year end. This will allow you to prepare your tax return faster and determine as soon as possible whether you have a tax liability or not that needs to be addressed. It also allows your accountant to finish the returns prior to tax season kicking in at full gear.
6. Pay quarterly estimated Federal tax on January 15th.
7. If one thinks that he or she will owe money on one’s tax return for the current year, it is important that you file your return as soon as possible. One is allowed to file a return as soon as the IRS starts accepting returns, but one is not required to pay the balance due until April 15th. The worst thing to do is to go on extension if you still owe money. The IRS assesses late filing penalties of 5% per month if the amount you are required to pay with your return when you ultimately file exceeds 10% of the total tax shown on your return. However, if you file early but still owe money, the late payment penalties are only ½ of 1%—1/10th of the late payment penalty.
8. Pay January mortgage payment in December to accelerate mortgage interest deduction into the current year.
9. Pay real estate tax bills due on February 1st in December in order to accelerate tax deduction into the current year.
10. Update mileage records are record final mileage on your auto if used in your business to facilitate calculation of mileage deduction for current year. This often causes problems because people do not record year end mileage and are then struggling to determine plausible mileage usage on their autos.
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