Banner Image

End of Year Tax Planning: Planning For Your Biggest Savings.

Posted by Emily Taibl on Sep 26, 2017 2:15:21 PM


New Year 2018 concept with hourglass falling sand taking the shape of a 2018

By Thomas Jones

Fed up with overpaying taxes?  Find a new CPA!  While we would concur with this, there is only so much a tax preparer can do to limit taxes while preparing a return during tax season.  Where things become real- where you truly save taxes- is tax planning.  And very few CPAs can advise efficiently on strategic tax planning.

Some CPAs might offer a few tax planning thoughts when you file in March or April. But that leaves eight to nine months for your financial situation to change.  October and November are ideal.  It’s easier to project end of year income and still allows time to make key changes.  While it’s easy for us to suggest contributing to a Defined Benefit plan or Charitable Remainder Trust, all the preparations that go into realizing those contributions are no overnight endeavor.

3 Principles of Tax Planning:

  1. Change your tax rate
  2. Move your money someplace cheaper
  3. Defer revenue

Change Your Tax Rate

Not all income is taxed the same. Your salary is earned income.  Rentals produce passive income.  Securities pay qualified dividends but are taxed as capital gains or capital losses when you sell them.  But not for Traders in Securities.  Special elections can be made to change the character (i.e. how that activity is taxed) to a more favorable tax rate.  Incorporating or making a Small Business Election, can completely transform how a small business is taxed, potentially saving tens of thousands.

The same concept applies to deductions. Is your phone deductible?  It depends.  Are you required to use it for business regularly?  What about your kitchen, can you deduct that?  I have some chefs and restaurant owners that say absolutely, since they must be constantly inventing.  Not many people know the IRS allows investors to depreciate their home workstation if they use it to manage and monitor investments. But if you spend a considerable amount of time making lots of trades, you might qualify as a Trader in Securities which opens up a whole world of business-related deductions.

While it’s possible to change the character of how some activities are taxed, the IRS is strict about how to qualify. An experienced tax professional will consider factors such as material participation, at-risk limits, hobby loss rules, and other situational tax factors to help guide you on the most appropriate path.

Move Your Money Someplace Cheaper

We know not all people are taxed the same rate. Our progressive tax structure fundamentally encourages wealth distribution.  So use that to your benefit.

Rather than gifting your kids cash, gift them that Apple stock you’ve been holding on to for decades. Encourage them to get student loans and once they turn 26, they can cash the stock to pay off their debt.  Combine that with a trust that only gifts the stock if they graduate and you have a very compelling reason for your son or daughter to finish college.

Here’s a triple win: don’t buy your kids a car. Gift them that income fund you’re paying nearly 40% taxes on.  Not only are you saving a grand in taxes, but you’re teaching them how to use investments to finance liabilities while building their credit score.  Family partnerships and LLCs also have tremendous benefits in this area.

Defer Revenue

Perhaps the most common tax planning strategy is revenue deferral. 401(k)s, 403(b)s, IRAs, Deferred Comp, and the list goes on with the various types of plans allowed under the Code.  But there’s a few that are frequently overlooked.

Small business owners have the greatest opportunities. For family-owned ventures with no permanent full-time employees outside of family, the Solo 401(k) plan offers tremendous benefits.  Often, these plans can be self-directed at the owner’s discretion (i.e. you can purchase real estate or invest in hard money loans) and higher contribution limits through business profit sharing.  In-plan Roth conversions can be made and the plan can make loans to the owner, such as if there was a cash flow shortage.

Any savvy real estate investor knows about 1031 Exchanges, but not many consider the simple strategy of seller financing or rent-to-own to defer the recognition of gain over a period of years.

Conversely, just like revenue can be deferred, deductions can be accelerated. Certain qualifying work vehicles can be written off with Section 179 rather than being depreciated.  Securities traders can elect Mark-to-Market.  Some expenses can be prepaid and deducted in the current year, rather than waiting the following year to benefit from the tax savings.

Failing to Plan = Planning to Fail

As with any of these planning principles, you should consult with your experienced CPA. Not only are the rules strict, but some otherwise legitimate tax reducing strategies could be at risk under audit if not properly planned out in advance.  Many times, an election must be made early in the year, such as with Mark-to-Market or Small Business Treatment.  Not to mention, your CPA can advise you on which documentation to keep, which will further legitimize your tax position.

While some taxpayers may already be doing all they can, I believe many more could benefit from an effective tax planning session. It’s not uncommon to find savings of $5,000 or more.  And we could tell you stories how tax planning helped save some clients hundreds of thousands of dollars in the long run.

If you haven’t already scheduled a time for end of year tax planning, call Sweeney Conrad at 425-629-1990 to get started.

Topics: Tax

Learn more about the services Sweeney Conrad offers