Deferring Income to 2005 

If you expect your AGI to be higher in 2004 than in 2005, or if you anticipate being in the same or a higher tax bracket in 2004, you may benefit by deferring income into 2005. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket.

 If you are a cash-basis self-employed taxpayer, delay year-end billing to clients so that payments will not be received until 2005.

Conversely, it may pay to accelerate income into 2004 if your marginal tax rate is much lower this year than it will be next year.

Accelerating Deductions in 2004 

An expense is only deductible in the year in which it is actually paid, although credit card charges are considered paid in the year of charge regardless of when you pay them. 

 Pay a state or local estimated tax payment in December instead of at the January due date.

 Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deductions.

 Consider making charitable contributions of property (i.e. Goodwill) as well as money to charity. A deduction is usually available for the fair market value of property, although certain property is limited to cost basis. Contributions of appreciated properly (i.e. stock) provide an additional benefit in that you can avoid paying capital gains on any profit. Deduction of gifts for used cars will be tightened next year, therefore you may want to make such a gift before the end of 2004.

Investment Gains and Losses 

Minimize taxes on investments by judicious watching of gains and losses. Where appropriate, try to avoid short-term gains, which are taxed at a much higher tax rate (up to 35%) than long-term gains (typically 15% or 5% for an individual in the 10% or 15% marginal bracket).

 If you have a large capital gain this year, consider selling an investment which has an unrealized loss. Capital losses are deductible up to the amount of capital gain plus $3,000.

ü Before investing in a mutual fund, determine whether there will be a dividend at the end of the year which could make a substantial difference in the tax you pay.

Year-End Giving to Reduce Potential Estate Tax

For many, sound estate planning begins with gifts to family members which reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, in holiday season, in ways that qualify for exemption from Federal gift tax.

 Gifts to any donee are exempt for gift tax up to $11,000 annually ($22,000 for husband-wife joint gifts).

 Gift property that has already appreciated, whereby the donee, not you, will realize and pay income tax on future earnings and unrealized gain on sale.

These are just a few of the year-end tax planning moves that could make a substantial difference in your tax bill for 2004. Contact your professional tax advisor for help in implementing any of these strategies as they are general in nature and your specific tax or financial situation may require special planning.

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