Year End Tax Planning

By Karl L. Fava, CPA
as appeared in
the November, 2002 edition of Staff Forum, (UAW International Staff Council), Volume 11, Issue 2

Even though there is only a month left in 2002 this is still a good time to implement tax savings strategies. Tax savings and financial planning should be focused on all year long and depending on what time of year it is there are opportunities that everyone should review for applicability. Two of the most important strategies at year-end relate to deferring income and accelerating deductions.

For many taxpayers deferring income may not be an option as they are paid as employees and do not control the timing of their compensation. Business owners or people with sideline businesses typically find it easier to defer income than employees do. Even so, an employee may find some deferral opportunities. An example is year-end bonuses or holiday bonuses and gifts. When you know that there is an imminent payment to be made you should request of your employer to hold off on the payment until the first week of January. In doing so the income will not be taxed until 2003 versus the current year. Additionally, by deferring income you may have the ability to avoid falling into a higher income tax bracket.

An easier strategy to implement is the acceleration of deductions into the current year. One of the most common tactics in this arena is the prepayment of real estate taxes at the end of December versus waiting for the typical winter due dates in January and February. By accelerating a deduction into the current year versus waiting till the next year allows you to reduce income tax now. In doing so you have the benefit of using dollars that would have otherwise been used to fund taxes. Let’s say you are in the 30% tax bracket and you can accelerate $5,000 of additional deductions into the current year. This would create a tax savings of $1,500. This $1,500 could be invested, (even in a simple savings account), and create investment income that you would not have otherwise. Additional areas of deduction acceleration relate to state income taxes. Its always good to calculate before year-end what you project as your Federal and State income tax liabilities. If after doing so your see that you will have a payment due with your State tax return you should fund this liability before year-end versus waiting to make the payment with the actual filing. As with the property taxes the deduction is “pulled forward” and creates an immediate savings for you.

Charitable contributions are also an area for year-end planning. Again, given that contributions are tax deductions you may want to accelerate deductions into the current year. For example you may allocate a certain amount per month for your religious organization. If this is the case you may want to fund the January contributions in December, or even more. In fact, a strategy for individuals who contribute substantial amounts to charities, (tithe), and would not normally have the benefit of itemized deductions is to pay the full of next year’s contributions in December thereby creating two full years worth of deductions in the current year. This may allow a taxpayer to itemize deductions where as they normally would not be able to. In doing so, the taxpayer would set a pattern of itemizing deductions in one year and not in the next.

Year-end security transactions should be reviewed for potential tax savings. If you have incurred capital gains earlier in the year there may be an opportunity to offset that gain with a loss. If you have securities that decreased in value and you do not anticipate the value coming back in the near term it may be a good time to sell for a loss thereby creating a capital loss to offset the gain. (Note there are wash sale rules that would temporarily disallow the loss if the same or similar security were purchased within thirty days). Securities such as stocks can be used as year-end charitable contributions. There is a double benefit here. Lets say you purchased a stock for ten dollars and its now twenty five. If you were to sell it you would incur a fifteen-dollar gain and have to pay taxes on it. Under the rules for contributions of securities you could make a contribution of the $25 stock, not pay tax on the $15 gain, and take a tax deduction of $25.

Other year-end strategies revolve around your financial well being. Before year-end is a good time to consolidate investment and bank accounts. You may have two brokerage accounts and then end up having to track two separate monthly statements. Consolidating the accounts would save you time and file space. You should review this with all of your accounts. Additionally, year-end is a good time to review the financial goals that you established at the beginning of the year to see if you achieved your goals. In doing so, you can begin to summarize your goals for the New Year.

These are just a few of the ideas to implement at year-end. As with all tax and financial related matters it is always good to review your plans and strategies with a professional in that field. The ideas and strategies promulgated may be good for some, but not others. Additionally, there is always the alternative minimum tax that has to be reviewed prior to any income deferral or deduction acceleration.


Karl L. Fava, CPA, MBA is president of Business Financial Consultants, Inc., (BFC). BFC located in Dearborn, Michigan is a nationwide firm providing tax and financial services to individuals and businesses across the country and offshore. In the United States BFC has clients in most major cities and aggressively seeks to maximize tax and financial strategies for them. BFC’s web site is Mr. Fava’s e:mail address is BFC’s telephone number is (313) 359-9358.