Blog | Personal Finance

Why Year-end Tax Planning?

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This is the time of year that we contact all of our clients and suggest that they do some year-end tax planning with us. Many of you wonder why planning at this time of year is so important. Let me give you three quick reasons.

Reason #1: AMT.

More and more people are subject to the Alternative Minimum Tax. The reason this is a problem is that you lose many of your deductions if you are subject to the AMT. For example, your state income and real estate taxes are no longer deductible. Nor are your investment expenses.

The good news is that you can avoid or minimize your AMT if you do proper planning at year end. Will you be in the AMT for 2012? Then, you may want to postpone your final estimated tax payment until 2013. Same with your investment expenses. Postpone paying them.

Reason #2: Estimated Payment Penalties.

If you have income outside of your regular employment, you are probably making estimated tax payments. To make sure you have made sufficient payments to avoid penalties, do a year-end tax projection now. You may be able to avoid penalties even if you are currently underpaid by a significant amount.

Reason #3: High/Low Income Year.

I have run into many people this year who are either having an extraordinarily good year or a very bad year. Many people with real estate are having a bad year. What can be done at year end? Reverse Tax Planning. Rather than accelerating expenses as you usually do, you may want to push expenses to next year. Otherwise, you risk losing the deduction or taking it in a year when your tax rates are really low. If possible, you may also want to accelerate income. This way, you can avoid losing itemized deductions and personal exemptions that cannot be carried forward or back.

So take some time to meet with your Tax Advisor in the next week or two while there is still time to project your income and make a permanent impact on your taxes through a little year end planning. Then, take those savings and invest them to create additional Velocity in your portfolio.

Original publish date: November 28, 2012

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