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Practical Planning Tip: Year-end Income Tax Planning

December 20, 2023

Today’s year-end planning tip will cover the topic of Income tax planning ideas.

The first important item to consider is utilizing tax projections to help lower your tax bill in the future. This is something your CPA can help you with. These projections show what your tax future might look like based on a set of assumptions. They are most impactful for people who have control over the timing of their income, like a business owner.

In general, year-end income tax planning often involves trying to accelerate deductions and defer income while being sure to take advantage of lower marginal tax rates and avoid income bunching in future years.

A good starting point is using your income and deduction information from your last tax return and adjusting for anything you know about the current year, such as changes in income, tax rates, potential deductions, and so on. Then calculate what your taxes would be based on those conditions.

The more you know about your current year’s finances, the more accurate the projection will be. That’s why it’s important to wait until later in the year to run a projection. For clients with more complex finances, like business owners, executives with lots of non-salary compensation, or someone retiring this year or next year, you may want to run a few tax projections a year based on different scenarios.  

Since income tax brackets are slated to revert to the pre-Tax Cuts and Jobs Act levels, the top tax bracket may increase to 39.6% from its current 37%, so the typical decision of deferring income may not be a smart decision. Not only is the top rate increasing, but the middle tax brackets will expand to capture people who are in a lower bracket today.

Planning tips:

First, Opportunities to consider in a higher-than-usual income year may include:

  • Maximizing contributions to tax-advantaged accounts
  • Accelerate income tax deductions
  • Tax-loss harvesting
  • And Accelerating income

On the other hand, Opportunities to consider in a lower-than-usual income year may include:

  • Converting pre-tax assets to a Roth IRA
  • And Proactively taking distributions from your IRA account

You can watch the FULL video here.