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End of Year Tax Tips
Q: This year has gone by really quickly and I don’t want to wait until April to start thinking about taxes. Is there anything that I need to do before the end of the year to help reduce how much tax I have to pay?
A: Happy Thanksgiving and congratulations on getting a head start on tax planning. It is important to note that most tax savings ideas end with the New Year’s Eve party so acting prior to the end of the year is critical. There are two sides to the overall calculation of your taxable income. The first is the recognition of income and the second is the recording of deductible expenses. Therefore, effective tax savings can be accomplished by either reducing total income or increasing total deductions.
Reducing income simply to avoid taxes is certainly not recommended, however, the timing of that revenue can be beneficial from a tax standpoint. As a tax basis taxpayer, you will only recognize income to the extent you have constructive receipt of the cash. Billings near the end of the year that are not actually collected until after the end of the year will not be included on your tax return until the end of the next year. To the extent you have the flexibility to manage those cash receipts so that income is not recognized until next year. This only changes the timing of the taxable income but delaying collections until after January 1st will delay the related tax and therefore reduce that amount you will need to pay for this year.
The expense side is a bit more intuitive in that additional deductible expenses will reduce your taxable income and save taxes. First of all, never, ever spend money just to get a tax deduction since you will be spending the money but only saving a fraction of the amount spent. However, if you will be spending the money anyway, it is a good idea to accelerate those expenses and pay them prior to the end of the year to make sure the deduction is available. If you know you will be buying a new computer or office equipment, supplies, or maybe dues to your favorite non-profit business association (hint, hint) try and move those expenses into 2015 rather than waiting until 2016 thereby reducing the tax that you will owe for 2015.
Don’t forget that investing in your own future can also provide significant tax savings, so make sure to plan on making contributions to your SEP or IRA account before you file your tax return. This does not have to be accomplished before the end of the year but starting now to plan your cash flow will make it easier when the time comes to actually make that contribution.
As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.