10) Income Tax Planning

Effective income tax planning results in the lowest legal income tax liability for an individual, trust, foundation, corporation, or other tax-paying entity. 

One longstanding planning principle is to defer/delay income as long as possible and accelerate deductions. Individuals report income and expenses on the “cash basis.” This means you report income when it is received and report deductions when paid.

Good tax planning (always exceptions) is to delay receiving income, if possible, and pushing it into the next year.  Likewise, taking deductions now rather than later tax year makes sense.

It is important to monitor capital gains and losses during the year.  If there are net capital gains before year-end, consider selling stocks with unrealized losses to offset the gains.

If there are net capital losses, consider selling stocks with unrealized capital gains.  You will then receive sales proceeds without capital gains tax. Be aware of the “wash sales” rules that can prohibit the ability of taking a loss when selling a stock for a loss and then with-in 30 days of the sale repurchasing it.

Other ways to reduce income tax liability (if you itemize-your individual deductions are greater than the standard deduction) is making charitable donations. Donating appreciated stock (stock with an unrealized capital gain) avoids a capital gains tax and results in a deduction for the market value of the stock.

Take advantage of company sponsored 401-K plans and consider funding an individual retirement account (IRA) or Roth IRA.

Tax-deferred savings plans (401-K, IRA, Roth IRA) allow savings to grow tax deferred until age 73. Withdrawals are taxed as ordinary income except Roth IRA withdrawals are tax-free.

There are several unique situations such as selling a business or investment property that require professional tax advice. Again, seek the advice of trusted professionals if you have specific tax questions.