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Be Prepared With Year-End Tax Strategies

December 27, 2022 by Ronald "Chip" Morrison

As the year draws to a close, tax season might be the last thing on your mind. But even if you’re more focused on holiday cards than tax returns, it’s worth taking a few moments to consider whether some end-of-year planning could result in a lower income tax bill next spring.

For most people, the best strategy is to defer income into the following year and to move as many deductions as possible into the current tax year. This strategy assumes that your income will not increase dramatically between this year and the next year.

Income

Often, deferring income is as simple as asking your employer to pay your year-end bonus in January instead of in December, or pushing back the deadline for a year-end project. If you anticipate being in the same tax bracket next year, this gives you the advantage of waiting a year before you are obligated to pay tax on that particular income. If you anticipate a reduction in next year’s income, you may have the added benefit of being in a lower tax bracket thus paying less tax on that bonus or the paycheck for that project.

Be careful, though – if you are solely in control of when you receive the income, the IRS treats that money as yours this year rather than next year.

Deductions

The idea behind accelerating deductions is just as straightforward. If taking more deductions this year will help you, bring as many deductions as possible into the current tax year. For example, pay extra toward medical bills, give a little more to your favorite charity, or max out your retirement contributions.

Generally, in order for this to be effective, these payments have to be delivered by the end of the year, which means you cannot write a check on December 28, but then give it to your favorite charity on January 2.

A word of caution about deductions: for certain kinds of expenses, the amount does matter. For example, medical and other expenses must reach a minimum threshold before they are deductible. This is where “bunching” your expenses into a particular year to meet the threshold can be helpful.

At the other end of the spectrum, certain deductions won’t do you any good unless your income is within certain limits. Deductions for rental property losses fall into this category. Up to 85% of Social Security income becomes taxable if you have too much income from other sources.

Increased Income

These are not one-size-fits-all solutions. For example, if you anticipate an increase in next year’s income that will push you into a higher tax bracket, deferring this year’s income is not a smart move. Instead, you’ll want to take the opposite approach, and accelerate as much income as possible into the current year while deferring as many deductions as possible.

Other Considerations

You likely already know that major life changes such as marriage, divorce, or the birth of a child can affect your tax bill. But what if you are providing partial or full support for one of your parents? If you are covering all or part of a parent’s medical, educational, or living expenses, you might be able to qualify your mom or dad as your dependent for tax purposes. If you and your siblings are sharing the responsibility for your parent’s expenses, consider having a family meeting to arrange your contributions so that one of you can claim your parent as a dependent.

Finally, take a look at how much tax you have already paid this year. Is it enough? This is a particular concern for those who owe quarterly estimated payments. If it appears you’ll come up short at tax time, take action now. Look into making additional tax.  You could also ask your employer to increase your withholding until the end of the year to minimize the impact of any underpayment penalty.

A careful look at your tax situation now – while there is still time to take action – can save you time, money, and regret next spring.

About Our Law Firm

Mr. Morrison is a board-certified estate planning attorney with experience in both simple and complex estate matters. He can prepare an estate plan for you that achieves your goals of passing your assets to whom you. The planning can even help minimize estate taxes. To learn more about how you can achieve your estate planning goals, please call (504) 831-2348 or visit our website at www.morrisonlawplc.com.

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Ronald
Ronald "Chip" Morrison
Ronald “Chip” Morrison, Jr. is a Board Certified Estate Planning Law Specialist as certified by the Louisiana Board of Legal Specialization. He is admitted to practice before all State courts in Louisiana. He is also admitted to practice before the United States District Court for the Eastern and Middle District of Louisiana.
Ronald
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About Ronald "Chip" Morrison

Ronald “Chip” Morrison, Jr. is a Board Certified Estate Planning Law Specialist as certified by the Louisiana Board of Legal Specialization. He is admitted to practice before all State courts in Louisiana. He is also admitted to practice before the United States District Court for the Eastern and Middle District of Louisiana.

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