Tax Tips
Mid-Year Tax Planning - August 2004
Richard Scrivanich - Partner
Mid-year tax planning is a good way to estimate your income and deductions for the year, and help you lower your tax bill; estimating these amounts will help guide your other tax planning moves. Through planning, you may be able to defer taxable income to a later year (or accelerate it, if that makes more sense), and to accelerate deductible expenses into the current year (or defer expense into a later year, if that makes more sense). By projecting your income and deductions for 2003, you are in a position to know whether to accelerate or defer income or deductions.
If possible, estimate whether your 2004 income will be higher or lower than your 2005 income. If, for example, your earnings will be higher in 2005, will you be pushed into a higher tax bracket? If so, you should consider accelerating income into 2004, and deferring deductions into 2005. If, however, you expect to be in the same tax bracket in 2005 as you are now, then it is generally a good idea, due to the time value of money, to defer income and accelerate deductions.
In estimating your income for 2004 and 2005, consider whether there will be any change in income, filing status, or entitlement to tax benefits due to marriage, divorce, birth of a child, loss of a dependent deduction, purchase or sale of a home, etc. Once you've estimated your income, here are some ways to help you reduce your tax bill:
Reduce the amount of your taxable income.
To reduce the amount of income you will be taxed on in a given year, consider making (or increasing) contributions to retirement plans and accounts, such as 401(k)s, IRAs, and Keogh plans, or investing in tax-exempt bonds or funds.
Another way to affect your income amount is by timing the sale of any capital assets. Although tax reasons should not be your only consideration, a well-planned sale can, in some circumstances, optimize the tax benefit of capital losses for the year. If an individual sells stock or other investments, the net capital gains may be taxed at the maximum capital gains rate. Capital losses are first applied to offset capital gains; $3,000 of any remaining capital losses can be used to offset other income.
Bunch itemized deductions.
"Bunching" means to accumulate as many of the deductions in one year in order to defeat the floor that applies before the items are deductible. For example, for "miscellaneous itemized deductions," the floor is 2% of your AGI. Thus, if your AGI is $100,000, you must have at least $2,000 of miscellaneous itemized deductions to deduct even one dollar. Miscellaneous itemized deductions include:
- Employee business expenses, such as travel, dues, etc., that are not reimbursed by your employer;
- Tax preparation fees;
- Safe deposit box fees;
- Certain investment expenses.
Time equipment purchases and depreciation deductions.
For business, the proper timing of equipment acquisitions can increase the overall depreciation for the year. Under a general depreciation rule called the "half-year" convention, a business can deduct an entire half-year's depreciation for all equipment that is "place in service" (i.e., use of the equipment has begun) on or before the last day of the tax year. Thus, whether the equipment is placed in service on January 1 or December 31, the same half-year's worth of depreciation is allowed.
However, there is a trap in the rules, known as the "mid-year" convention, which is applied as follows: If more than 40% of the cost of all personal property placed in service by a business during a tax year is placed in service during the last quarter of the year, then the business only gets one and a half months' worth of depreciation for property placed in service in the last quarter. Adjustments are also made to the usual depreciation amounts for assets placed in service during the other three quarters of the year.
If you have any questions concerning tax planning strategies, or any other tax, accounting, or business matter, please give me a call at (562) 698-9891.
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Some of the articles included here were written in a prior
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relate only to the year for which the article was written and could be different
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acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
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