Tax Planning For Year End

It’s the end of another grueling year in which the rigorous exercise of summarizing all of our financial decisions for the prior year is finally complete just in time for the holidays. Even for those lucky enough to get refunds from the IRS or their state, income tax filing is a stressful and time-consuming affair that is about to repeat itself in about two and a half months.

Before you put taxes and finances out of your mind, begin vacation planning and breakout the gift wrap, I hope you will consider one financial strategy that could invariably make the holiday season more blissful – year-end tax planning. I have had several clients come in at the final deadline unaware that the events of their year last year left them in a tax situation that was unfamiliar and costly due to lack of planning. Here are five reasons taxpayers should consider year-end tax planning:

1.) Avoid Penalties for Late Payments – A client came in to my office in the beginning of October to get her taxes done on time – we had filed an extension based on her previous tax filing. Two years ago she had inherited an investment account. She has an investment adviser who was successfully navigated the volatility of the year’s stock market and locked in her gains by selling off riskier stocks at a profit. This October she brought me her investment documents only to find that her account had earned capital gains that effectively doubled her normal income. She was shocked by this turn of events because she didn’t understand what was going on in her investment account. Planning may not have eliminated the taxable income, but would have allowed us to make estimated tax payments to avoid the penalties and interest for late payment.

2) Debt Forgiveness - So many people have lost their homes and/or investment properties to foreclosure or short sale or loan modifications. However, each forgiveness comes with its own set of rules dependent on your income, the type of property, the way properties have been treated in the past, your level of income, etc. A taxpayer sent me their records late in the summer including several 1099s indicating they had lost property to foreclosure. They assumed the loss on the investment would cover the debt forgiveness. What they did not realize is the rules were different for them due to refinancing and taking cash out of the property and depreciation recapture rules. Instead of a wash they had a gain, and because it was from primarily the recapture of depreciation it was taxable at ordinary rates instead of the more favorable capital gains rates.

3) Closing a Business – In many cases people close their businesses by shutting the doors and turning off the phone. Technically, there may be more steps. Particularly if you are a California business, improperly dissolved companies may continue to rack up bills that the State of California will aggressively attempt to collect.

4) New Rules & Taxes - These past years have brought a flurry of new regulations and taxes. Many of them don’t affect most taxpayers. But some of them will have a substantial impact. In addition, there are a lot of tax issues being considered still for the current year as well as the upcoming one – planning will alleviate the surprises during the tax season when nothing can be done to change anything. Planning will also help lay the groundwork for actions you would like to put in place for the coming year before it becomes too late.

5) Large refunds – Many taxpayers enjoy feeling like its Christmas when they receive large refunds. However, who couldn’t use some of that money during the year. Current year refunds do not accrue interest from either the IRS or State. Year end planning can tell you if you’ve overpaid to perhaps plan on keeping more money in your pocket during the holidays.

Tags: income tax, plan, planning, save taxes, tax strategy, taxes, year end planning