When it comes to income taxes, timing can be a critical
component of any strategy. How does timing affect your tax bill? This effect
could come in a variety of ways throughout the tax calculation process. Here
are a few examples for taxpayers in a variety of different situations.
1. Deferral or Acceleration of Income
Some taxpayers have the ability to alter the timing of their
income sources. For instance, a bonus paid in December increases taxable income
in the current year. Deferring it to January would generally affect the
following year's income. A salesperson who earned less in the current year may
benefit from including this income in December rather than risking higher
taxable income in the upcoming year.
2. Deferral or Acceleration of Deductions
Just as you can sometimes adjust the timing of income, you
may be able to do so with deductions too. Business owners can often choose to
make deductible business purchases in one year or another, for instance. Some
prepaid expenses can also be paid (and deducted) before the end of the year,
particularly if the expense is for the first quarter of the new year.
Homeowners can often make this move with regards to property
taxes too. You are generally allowed to pay and deduct property tax for the
current year either in the current year or in the following one.
3. Timing of Capital Gains
Capital gains taxes come into play when you sell an asset
considered to be held for investment. Long-term assets - held for more than one
year - are taxed at a lower rate than short-term investments. So if you wait
until the year has passed before selling an investment, you pay lower taxes. In
fact, with the right income levels in one year, you may pay 0% tax on long-term
asset sales.
Anyone who owns their own home (or a rental unit) must pay
attention to capital gains tax rules in order to avoid paying taxes on the home
sale. Generally, if you sell the home too early, you may not qualify for the
$250,000 per person homeowner tax exemption. But if you wait too long and
haven't lived in the home for several years, you end up with the same
problem.
4. Retirement Account Withdrawals
Retirement accounts have very specific rules regarding when
you can and can't withdraw money. Failure to abide by their timing rules could
mean extra taxes and penalties. You must begin to take required minimum
distributions from traditional IRAs by April 1 of the year following the year
in which you turn 70 1/2. Taking money out before this may cost extra, and
failure to take out these RMDs on time will cost you.
5. Depreciation Options
Depreciation allows you to distribute the cost of larger
business or income-generating assets over a period of years. However, you
currently have several options as to how to time these depreciation deductions.
If your business has had a good year, you may opt to
accelerate the schedule by taking the entire deduction in the year of a
particular asset purchase. As an alternative, you may choose from one of the
allowed accelerated depreciation schedules to choose one that works for
you.
Obviously, the timing of purchases, sales, withdrawals, and
deductions can all make a big impact on your tax bill. But you must know how to
deploy them for the maximum benefit within legal limitations. A professional
accountant is your best ally in this endeavor. The finance and tax pros
at Williams
& Associates Tax Services
are ready to help. Call to make an
appointment today so you can start saving tomorrow.
