Tax Planning: A Year-Round Activity

But it’s not too late to start now

Most of us have an aversion to thinking about taxes. Even if we see value in government and the services it provides there is a certain amount of resentment to the idea that we are required to hand over a rather substantial chunk of our earnings to someone else. Unfortunately, it’s important to think about taxes if we are to minimize the impact of something we dislike even more: paying them.

The first thing you have to do is to be willing to plan ahead. Most of us file tax returns on April 15th, but the tax year actually ends with the calendar year. In my experience, the window for effective tax planning usually closes around December 1st, although some tax-saving transactions can be put into motion up until around December 23rd and the IRS gives you until the date you actually file your return to fund certain tax-favored investments.

The further ahead you plan, the more maneuvering room you have. At AKM, we always recommend that clients examine at least two years at a time. Additionally, it nearly always pays to work with a professional advisor – a CPA or financial planner – who understands the tax implications of a wide range of financial choices and knows the tax law thoroughly. Finally, remember that tax planning is not an event; it is an ongoing process.

Here are a number of strategies I recommend to my clients. None is a “quick fix” for tax savings; consider each within the context of your total financial picture.

Examine your portfolio carefully for gains

If a particular security has performed well and you’re thinking of cashing out, be sure to review all of the implications. Capital gains tax of 15% will apply to the full difference between the purchase and sales prices of securities you have held for a year or longer, but you can minimize this by gifting some of the appreciated security to a qualified charity. You’ll get credit for the full current market value of your gift and will owe no capital gains on that portion.

Think strategically about when to take losses

If you’ve accumulated some net long-term capital gain, it is usually a good idea to offset that gain with losses. Capital losses can exceed gains by $3,000, which you can then use to offset ordinary income.

Consider donating appreciated securities to your favorite charity

You both win. The charity will receive a donation that is the same size or larger than the one you first contemplated. You will relieve yourself of any capital gains obligations for the security you donated and will also be able to deduct the full current value of the security.

Review your opportunities for deferring income

If your employer is amenable, you can defer some of your income – such as a bonus or final salary payment – into the next tax year. If you have your own business, it might be a good idea to send your December billings at the close of the year. Again, whether this strategy will benefit you depends on what is likely to happen in both tax years.

Time state and local tax payments properly

If you pay estimated state and local taxes, you can prepay the fourth installment for the current year. Most states and localities send you instructions on how to do this with your tax bill. However, if the Alternative Minimum Tax (AMT) will apply to you in either of the two affected years, it is usually not a good idea to do this.

Look for other deductible expenses that you can pay in advance

Professional organizations and periodicals, for example, often allow – or even encourage – you to renew memberships and subscriptions in multiple-year increments. This typically saves you money in the short run and allows you to deduct larger chunks at one time.

Be aware of how AGI will affect you

Many deductions must reach a certain floor, expressed as a percentage of your AGI. Medical expenses, for example, are at 7.5%; miscellaneous expenses are at 2%. Try to incur expenses – or at least the bills for them – in the tax year where you can maximize the deduction.

Fund your retirement

IRAs and 401(k)s are a great way to hang on to more of your money and leverage the available tax advantages. There are a number of approaches which can be beneficial depending on your specific circumstances. The law changes all the time in this area and opens new opportunities. Recent changes will put Roth IRAs within reach for more taxpayers for a brief period.

Monitor changes in the tax law

Actually, your CPA or financial advisor should do this for you. We now know what’s likely to happen through 2010. One law rewards certain energyconscious activities for a brief period and another allows individuals older than 70 1/2 to make gifts from IRAs.

Do a tax projection

The single most significant tax status change that will affect many taxpayers in the next few years is the Alternative Minimum Tax (AMT). This is not something you want to take you by surprise.


Incorporating tax planning into your overall financial planning can help you keep control of more of your money and help you reduce your tax bill. The further in advance you are willing to plan and the more you consult your tax advisor, the more opportunities you can leverage.

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