We are nearing the October filing deadline, so all the crying is almost over for last year’s tax return submissions. We’ve blogged throughout the summer on various topics, but now you’re down to a few weeks to effectively do 90% of what can be done to affect your current year tax liability. Only a few things can be done after December 31st, once you realize how big the bill actually is. If you’re an individual making less than top wages, you can open and fund IRAs after December 31st to reduce this year’s tax bill. Other than that, there’s little that can be done once the ball drops on New Year’s Eve. You have until then to get your act together, figure out where your tax liability might be, and then “fire your countermeasures.” We lose productivity around Thanksgiving and Christmas of course, so six or seven working weeks is about all that’s really left. From simple things to the more complex, here are some ideas to get your wheels turning.
>If you’re a small business owner, you have a little time left to open a 401(k), SEP IRA or whatever is the correct retirement account for your legal structure. You have more time to fund those plans, but you’re running out of time to create the plan documents. The IRS deadline for documents to be in place is soon, whereas the deadline for putting money into those plans is a little bit longer. If you have been thinking about establishing a retirement plan for your business, reach out to your financial advisor and ask about the deadlines.
>Next, if you have additional income this year that you haven’t had in the past, consider investing in equipment you might need over the next few years. Perhaps you need to take them all as a full deduction now? That could help offset a windfall income from a good year. However, it’s never a smart thing in business to simply spend money to avoid taxation. You’ve got time to consider what you might need, shop, and then have your tax advisor help pro-forma out for you what a five-year depreciation versus an all-in-one depreciation might look like on this year’s return.
>For clients with more income, and therefore bigger tax problems, there are many IRS approved tax credits and deductions; charitable trusts, land easements, and on and on. These are often semi-complex tools only appropriate for accredited investors. Buying income tax credit investments just to get a tax deduction is almost never the right thing to do, but if you have an appetite for risk and reward and you already have some of those types of investments that meet the right profiles in your portfolio, why not consider replacing them or adding to them with something that meets the same criteria from an investment standpoint and also gives you tax credits?
These are largely overlooked by financial advisors because the tools are too complex for their comprehension (get a smarter advisor if so). These are legal and ethical tax planning vehicles. Opportunity Zones are a new tool added recently to that list. Take some time to comprehend and understand what could give you great tax benefits. As long as you get more than one goal achieved when investing in tax credit areas, it can be a super smart thing to do.
Again, timeline, timeline, timeline. All this stuff takes time to consider and implement, and we are almost into October. Remember, you’re going to lose time to holidays and family between now and the end of the year. Educate yourself in the next few weeks on the tools you might want to use, take a few weeks to consider and fine-tune what you’d like to do, and remember it will take time to get the actual transaction(s) completed. So, the clock is ticking. If you want to plan your own tax outcome, get to it.
P.S. The IRS LOVES procrastinators and the extra taxes they bring to the Treasury!