Most of the during the year planning our office does involves minimizing the taxes for the current year. That historically is the easiest type of planning because the laws are in place for the current year. We can plan steps to defer income or increase deductions to the current year. That leads to a favorable short term outcome but considerations of beyond this year need to be considered so that this year'is actions are not detrimental in a future year. I observed this several years ago when the large deduction was allowed for SUVs, the full allowed deduction would be taken in one year but the vehicle was financed and payments extended 4-5 years into the future with no major tax break after the first year. Explaining and understanding these choices can be very beneficial for both the taxpayer and the advisor.
When asked if a deduction should be accelerated or income deferred, my answer is often "it depends". Some of the considerations include:
- Am I near a change in marginal tax brackets?
- Do I expect income to be higher or lower in the future?
- Does my income exceed thresholds for tax credits?
- Will my income level impact available health insurance subsidies?
- Will I exceed allowable limits on earnings for early Social Security recipients?
- Is my income going to impact Medicare premiums?
- Does lowering my income affect my application for financial aid, sale of my business, line of credit with the bank, ability to refinance my house?
- Do I need the additional income now versus saving for retirement?
And there are other considerations that you may think of that I have not listed, some tax considerations and some not. Everyone's situation is unique and as such needs attention as such. I recommend that you review your financial situation more frequently than just at tax filing time. We call current year planning appointments "mid-year" because it is still during the year and before the clock strikes midnight on 12/31 there is still time to take some action to impact your current year taxes.
Strive to learn more about your particular situation and take steps to improve your situation. If you need assistance, please seek the advice of a competent professional.