Tax Planning

November 2001

Tax Planning

Here are some simple rules of the game:

  1. Look at two years at a time. When you expect next year's revenue will be substantially higher than this year's, you might want to defer expenses until next year where possible; and where this year's revenue is expected to be considerably higher than next year's, take as many expense deductions this year as possible.

    For example, one attorney just closed a one-time deal of significant proportion; his current income success distorts his historical revenue picture. Thus, he thought it prudent to commit himself to an equipment lease with front loaded expenses that are deductible in the current year to offset some of the tax impact which will result from his good fortune this year. The equipment will benefit him in the future while a big chunk of the obligation will have been paid for with help (offset against income) from Uncle Sam.

  2. Realize losses on investments this year if you have high taxable gains this year. If you deal in securities, timing is important. Review "wash" sales, and review net losses carry forwards.

  3. Where taxable income is high, accelerate deductions such as pension/profit sharing contributions, charities, student loan interest, health insurance for self-employed persons, property taxes, etc.

  4. Defer income until next year if things are going well for you now and there is an opportunity to delay receipt of income ... unless you expect next year to be even better. Also, I become nervous when talking with clients about delaying the payment of their billings; I don't want to think it's o.k. to delay paying me their debt. But, reducing our collection efforts might have the same impact without the negative consequences.

  5. Pay January obligations in December including the fourth quarter State income/franchise tax estimate obligation and January mortgage payment.

  6. Another neat opportunity: for gifts to charities of appreciated securities, do not sell the stock and donate the proceeds because you will have to pay your capital gains tax! Instead, donate the appreciated security. You get to deduct the appreciated value of the securities while avoiding having to pay the tax on the capital gains!

  7. Review your estimated tax payments to date; if you will fall short of your total tax liability for the year, consider adjusting and increasing your withholding tax payments for the balance of the year.

  8. Where appropriate, consider the Alternative Minimum Tax (AMT). This can be a quagmire and requires careful scrutiny where applicable.

  9. Create your tax plan for next year based on your best estimates ... some planning, even if it has to be adjusted during the year because of unexpected opportunities will save you thousands of dollars!

  10. Create a business plan! ... only if you want to succeed! ... and be more profitable next year than last year.

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November 2001