- Accelerating deductions into the current year and deferring income, like year-end bonuses, into next year to reduce tax is the most traditional approach to tax planning. By doing so, you may avoid various phase-outs based on adjusted gross income (AGI). However, if you’re subject to AMT, the opposite strategy may be better to reduce this year’s and possibly next year’s tax.
- Bunching itemized deductions into one year may help you exceed AGI floors. Consider scheduling routine medical procedures and refilling medical prescriptions before year end or paying next year’s real estate taxes in the current year. Bunch professional fees, like legal or tax planning advice, to exceed the 2% AGI floor for miscellaneous expenses. Remember, using your credit card to pay these expenses will increase your deductions in the current year even if you don’t pay the credit card bill until next year.
- High earning taxpayers should consider ways to defer additional net investment income as well as reduce modified adjusted gross income to reduce exposure to the 3.8% surtax on unearned income.
- Make up a tax shortfall with increased withholding. Since you must pay tax as you earn or receive income, check withholding and estimated tax payments now while you have time to correct a shortfall. If you’re in danger of an underpayment penalty, consider increasing withholding on your salary or bonuses before year-end. Large late year estimated tax payments can leave you exposed to penalties for previous quarters, while increasing withholding is considered to have been paid evenly throughout the year.
- It isn’t too late to fund your retirement account. Contributions reduce taxable income at the time they’re made, and the taxes aren’t paid until you take the money at retirement.
- Review your investment portfolio and consider selling poor performing stock at a loss to offset capital gains.