Mastering the art of timing can be a powerful tax planning tool. Simply filing and paying on time can make a significant difference. So can managing the timing of asset purchases, capital gains and losses, and deductions. Consider the following ways timing can reduce your tax bill:
Failure-to-file and late payments. It’s critical to understand how expensive failing to file your taxes can be. It is potentially much more damaging than filing your taxes but failing to pay on time. That’s because the failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late, up to 25% of the taxes due. But that’s only the penalty. Interest over time can significantly increase the amount due. If you file your taxes on time but fail to pay on time, the penalty is much less, but it can still sting. For business owners, the failure-to-deposit penalty for payroll tax payments can throw a devastating blow.
Placed-in-service mistakes. If you’re a business owner, Section 179 deductions and bonus depreciation for assets like property, vehicles, and equipment offer immense tax-saving opportunities. It can potentially reduce gross income by the entire cost of the qualifying asset in the first year it’s placed in service. But therein lies the confusion: The year it’s placed in service may not be the year it was purchased. Let’s say you buy a company vehicle in December but spend over a month getting it outfitted and customized before it’s used for business. You won’t be able to take that Section 179 deduction the year it was purchased because it hasn’t been in service yet.
Capital gains and losses. It’s generally important to hold onto an appreciated asset (something that has increased in value since you purchased it) for more than a year. Sell sooner, and it may be subject to short-term capital gains rates, which can be significantly higher than long-term capital gains. If you’re in the business of buying and selling highly appreciable assets (like property), this rule can get very tricky very quickly. It can also come into play when there are capital losses if you get the timing right.
Deferring or accelerating income. Depending on how a business is structured, you could defer your income to next year or accelerate more this year, depending on what you might need to offset in which year. In other words, if you’re due a bonus or a payment near the end of December, you might consider delaying the payment or invoice to push the receipt of the money into January instead. You can take other steps to reduce your taxable income, like funding a retirement account, recharacterizing IRA contributions, and carrying back or carrying forward business losses. Donating to charity may offset gains, too. Developers have a unique opportunity tied to accounting methods to defer taxes on multi-year projects.
Estate matters. When discussing timing and taxes, there’s no more critical – and less controllable – variable than how death or incapacitation comes into play. It’s essential to revisit your estate plan and, if you’re a business owner, your succession plan, regularly. What life changes or asset changes have affected potential outcomes since the last time you reviewed these documents? Are there any law changes that affect your previous decisions? And are the people you put in place to take care of things in your absence still willing and able to do so?
Remember, when it comes to taxes, timing is truly everything. Feel free to contact us with questions.
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