In my tax practice, some of the the most frequently asked questions I receive are about year end tax planning.  As December 31st quickly approaches, here are some basic concepts to consider in trying to maximize deductions and minimize taxes.

The basic tip for tax planning is to accelerate deductions and defer income into the following year.  This especially holds true if you’re in a higher tax bracket in the current year and expect to be in a lower bracket the subsequent year.  If you expect the next year to be in a higher bracket, then consider the opposite….accelerate income and delay your deductions.  December 31st is a true cut off for deductions being paid and income being received.  And in most cases, December 31st is a firm date.

If you are an itemizer, meaning if you file Schedule A and itemize your deductions, the following done before January 1st will create a deduction in the current year. These are only meant to serve as general guidelines, so seeking professional tax advice for your situation is always recommended.

  • Make state and local income tax payments for the January estimated tax installment in late December and deduct the payment in the current tax year. 
  • Make your January mortgage payment on your residence at the end of the year.  This will enable your to deduct the interest portion of that payment in the current year.
  • If you have reached or are close to reaching your 7.5%-of-adjusted-gross income threshold to deduct medical expenses, consider doing and paying for elective medical procedures by January 1st to get the medical deduction in the current year.
  • Make donations to non-profits (church, for example) that you would’ve made in early January in late December.  Just remember to mail or charge your contribution by December 31st to write it off in the current tax year.
  • Consider making donations of appreciated stock that has been held over one year to qualifying charities.  You deduct the full value and don’t pay tax on the appreciation.  If you sell the stock and donate the cash, then the profit is taxed.  If the stock has lost value, then sell the stock first, which will allow you to deduct the loss, then contribute the proceeds to create a charitable deduction.
  • If itemizing deductions aren’t adding up to over the standard deduction, then try and postpone payments until the next tax year to try get the itemized deductions to count.
  • If you’ve wanted to convert your traditional IRA to a Roth IRA, doing so in 2010 may be tax advantageous.  A special deferral provision has been created for income on the conversion to be taxed in 2011 and 2012 on a 2010 conversion.  Seek tax advise on this provision as it has income limits tied to it.
  • Profits on sales of capital assets owned for more than one year and dividends in 2010 may let you use the 0% capital gains rate if you’re in the 10% or 15% bracket. 

Every tax situation is unique, but there are ways to help minimize tax burden if planning tips can be implemented.  Timing of income and deductions can become very important. Again, seek wise tax counsel for your own tax circumstances.