There’s still plenty of time to put last-minute planning techniques into play, but remember to consider your individual circumstances and consult a tax adviser. There is an extra wrinkle of complexity this year as the 2001 and 2003 Bush tax cuts are set to expire at the end of the year. Many members of Congress have expressed support for extending these tax cuts to some, if not all, taxpayers either temporarily or permanently. Without Congressional action, tax rates will rise to as high as 39.6% on ordinary income and 20% on capital gains. This uncertainty can make year-end tax planning tricky for even the most tax-savvy taxpayer—acting before knowing what Congress will do renders some planning a crapshoot. It may be prudent to prepare your strategies now, but wait to see what lawmakers do. With that in mind, here are 10 last-minute tax-planning tips (keeping in mind that Congressional action can affect which strategies make sense): 1. Adjust timing of income and deductions.
In years in which tax rates remain the same, it is generally recommended that income be deferred and deductions be accelerated – why pay tax today when you can put it off until tomorrow? However, if tax rates increase next year, it may be wise to reverse this strategy. Paying tax now at a lower rate may save you taxes in the long run. Generally this means you want to accelerate income into the current year and defer deductions into next year. There are plenty of income items and expenses you may be able to control. Consider accelerating bonuses, consulting income or self-employment income. On the deduction side, you may be able to defer state and local income taxes, interest payments and real estate taxes. But beware of the alternative minimum tax (AMT), which can affect timing strategies.
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