With two months left in the year, you still have plenty of time to do some end-of-year tax planning to minimize your tax bill in April. That’s why the end of October or beginning of November is a great time to figure out what you are likely to owe. Take a few minutes to run a set of financial reports to send to your accountant so he or she can estimate your tax liability for the year.
There is nothing worse than getting to April and finding out you owe a big check to the IRS. Once you get to that point, it is too late to do much of anything about it. Right now, you have options.
Year-End Tax Planning Options
It should go without saying that you should talk to your accountant before doing anything drastic, but here are few of the options you may have.
Defer (or Accelerate) Income
You may be able to shift some income to next year by sending your invoices after December 31st, or increase your income this year by collecting overdue invoices or sending your invoices early. Just remember that if you defer income to next year, you will have to pay taxes on that income next year.
Deferring or accelerating income can be a good way to smooth out spikes, but it is not automatically a good idea to always push income to the next tax year. Sometimes, the smart move may be to increase your income this year to put you in a better position next year. Your accountant can help you figure out whether it makes sense for your business, given your income this year and what you expect to earn next year.
First, do not spend money you wouldn’t ordinarily spend. Spending $1 does not result in a $1 reduction in your tax bill. It counts as a deduction, which might reduce your tax bill by 50¢ or not at all, depending on your situation.
That said, it may make sense to spend some money.
You can always just pay bonuses to your employees. This results in taxable income for your employees, but they probably won’t mind some extra cash close to the holidays.
If you don’t already have a retirement plan, set one up (see IRS Publication 560). It is deductible, and you should be saving for retirement anyway. Some plans require you to include employees, which might be a nice way to give a raise without increasing salaries. Some other fringe benefits are deductible, as well (see IRS Publication 15-B).
You could throw a holiday party for your firm, clients, or referral sources. It’s deductible, and unlike the above options, you aren’t creating taxable income for your guests.
If you can combine travel for work and pleasure, go on a vacation and write off the work-related percentage of the trip.
Although it’s a little late in the year to hire your kids, keep it in mind. You can teach them the value of work and reduce your company’s taxable income all at one. Plus, if your family is part of your business the options above may look even better. Pay them a bonus, start a retirement account for them, throw them a party, and take them to a conference.
Last but not least, consider charitable giving. Donations to non-profits are deductible, too.
There are some other clever ideas in this post on Forbes.
It bears repeating: don’t do anything drastic without consulting your accountant. You’re a lawyer not a tax expert (unless you are a tax lawyer), after all. There’s no point spending a bunch of money to bring down your taxable income and then finding out it didn’t work.
How to Avoid Surprises at Tax Time in the First Place
In Law Firm Finances, Randall Ryder’s advice is to keep a separate bank account just for taxes. This is a great way to make sure you stay on top of taxes year-round.
Calculate your estimated taxes at the beginning of the year and figure out how much you need to put into your tax account every month to make those estimated payments. Ideally, you should set up an automatic transfer. This is what my wife and I do, and tax time is pretty low-stress as a result.
Whenever you deposit “extra” income (i.e., more than you thought you would when you calculated your estimated tax payments), 1099 income, gifts, etc., put a third of it into your tax account. Do this on a monthly basis so you don’t get behind.
A little planning goes a long way. It is actually pretty easy to stay on top of your taxes if you start the year with good estimates and end the year fine-tuning your liability with the help of your accountant.
Originally published 2014-10-29. Last updated 2015-10-30.
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