Six money-savings strategies to employ before December 31st
By Steve Kopff, CPA
Would you like to reduce your tax payment this April? If so, December is the month to take steps toward that goal.
Most of the tax-savings tips you’ll want to employ in December center around “accelerating” payments and expenses, and “deferring” certain types of income. In other words, when you can, pay bills and incur expenses before December 31st, and claim income after that date.
Of course, this strategy doesn’t actually eliminate your tax liability, it simply defers it. But as you may recall from college math, the time value of money means that $1,000 in your pocket now may only be worth $950 a year from now. So this type of planning can pay off.
Tip #1: If you own your home, prepay the second installment of your property tax. Most property taxes are due in April, but if you make the payment before December 31st, you can take the deduction on your 2007 tax return instead of waiting until 2008.
Tip #2: Make your January mortgage payment before the end of the year. You can usually make the payment online, but if you decide to pay by check, be sure the bank actually receives your payment before December 31st. You’ll then be able to deduct the payment from your 2007 taxes.
Tip #3: If you are self-employed and submit quarterly tax estimates, pay your fourth quarter state estimate before the end of the year and deduct it this year.
Tip #4: Business owners can also pay expenses and invoices early, thereby deducting the totals from 2007 taxes. Many business owners, for example, load up on office supplies, stamps, and other items prior to December 31. If you use a credit card to pay these expenses, you’ll realize an additional bonus – your card payment won’t be due until after January, yet you’ll still be able to write off the expenses when they incurred – in December.
Tip #5: Do you have any losing investments in your portfolio? Sell them before the end of the year to offset any 2007 gains on which you might be taxed.
Tip #6: Business owners may also want to close major deals after January 1st to defer the income until 2008. Alternatively, you can invoice your clients for goods and services at the very end of the year in anticipation that their payments will not reach you until after the January 1st. Income is recognized only when it’s received, so in this way, you’ll defer the income to 2008.
A word of caution: Be sure to check with your accountant before employing any of these tips. There are certain instances when deferring tax liability may not be in your best interest. For example, if you anticipate earning substantially more in 2008 than you did in 2007, you may want to defer your expenses, rather than your income.
If you would like additional information on end-of-year tax savings, please email Steve Kopff, CPA at [email protected]