Year-End Tax Planning for Individuals

As we approach the end of the year, it's the perfect time to focus on tax planning. Effective strategies can significantly increase your savings and enhance your financial well-being after tax season. Let's explore some key planning aspects to consider.

Projecting Your Income

Begin by estimating your expected total income for the year. This should encompass your salary, business income, interest, dividends, capital gains, and any other income sources. Remember to account for any anticipated end-of-year bonuses or sporadic income sources. Understanding your current income lays the groundwork for effective tax planning in future years.

Understanding Your Tax Bracket

Familiarize yourself with the federal and state tax brackets that apply to your income level. This knowledge is crucial for making informed decisions regarding deductions and the timing of realizing capital gains or losses. Here you can find the 2023 federal income tax brackets.

Evaluating Retirement Plan Conversions and Contributions

Consider whether converting traditional IRA or 401(k) funds into a Roth IRA is beneficial, especially if you expect to be in a higher tax bracket in the future. Keep in mind that such conversions will incur tax liabilities. Contributing the maximum amount to any qualified retirement plans and Individual Retirement Accounts (IRAs) is a great way to maximize your deduction for the year. For 2023, the maximum elective contribution to a 401(k) or 403(b) plan is $22,500. For those age 50 or over, the limit is higher – $30,000 if the plan permits "catch-up" contributions.

Year-End Deductions and Planning

Make any planned charitable donations before the year concludes to leverage deductions. Grouping deductible expenses, like medical costs and property taxes, can help you surpass the threshold for itemized deductions [See Related: Freidel & Associates LLC | Bunching Itemized Deductions: Maximize your Tax Savings].

Reviewing Tax Credits

Make sure to look into all applicable tax credits, including the Earned Income Tax Credit, Child Tax Credit, and Education Credits.

Managing Capital Gains and Losses

If your tax bracket in the current year is lower than normal, consider selling investments that have appreciated in value that you’d like to liquidate. If you have appreciated investments, also don’t neglect to consider donating them, as that can be particularly tax-efficient. Also, consider the timing of selling assets that are currently in a loss position. Realizing these losses can offset gains and reduce taxable income, which is especially beneficial when you are in a high tax bracket in a given year.

Year-end tax planning is an integral aspect of managing your personal finances. By reviewing your income, understanding your tax situation, and exploring various tax-saving opportunities, you can significantly enhance your financial position for the new year. Consulting with a tax professional can further tailor these strategies to your unique circumstances, ensuring you make the most of your financial planning.

Please consult your tax advisor to understand any potential tax planning strategies. When we face more complex situations, we often run multi-year simulations to understand the financial benefit and trade-offs of different strategies.

Year-End Tax Planning for Businesses

Year-end tax planning is a crucial process for businesses, allowing them to minimize tax with financial strategies before the close of the year. This article will guide business owners and financial managers through key strategies to consider for effective year-end tax planning.

Understanding Your Current Financial Position

Review your company's financial statements to understand its profitability. If your business is more profitable than expected, you may be in a higher tax bracket. Assess your company's assets and liabilities. This understanding is essential for making informed decisions about year-end expenditures or debt repayments.

Accelerating Deductions and Deferring Income

If possible, defer income to the next tax year, especially if you anticipate being in a lower tax bracket in the following year. This strategy can include delaying invoicing or holding off on certain sales, depending on if you are on the “cash” or “accrual” method of accounting. Consider making necessary purchases before the year-end to claim deductions in the current tax year. This could include buying office supplies, equipment, or paying for services in advance, again also dependent on your method of accounting.

Capitalizing on Tax Credits and Deductions

Ensure you are taking advantage of all eligible deductions, including office expenses, travel costs, and employee benefits. Also, identify any applicable tax credits, such as those for research and development, energy efficiency, or hiring certain employees.

Employee Retirement Plan Contributions

Contributions to employee retirement plans can be tax-deductible. Maximizing these contributions can reduce your taxable income. For corporations, ensure that executive compensation plans are optimized for tax efficiency.

Inventory Management

Assess inventory for items that are obsolete or with a market value below cost, as these can be potentially be written down for tax purposes. Additionally, this review can help in streamlining inventory management, potentially leading to more efficient operations and cost savings in the new year.

Loss Harvesting in Investments

If your business has investments, consider selling underperforming assets to realize capital losses, which can offset capital gains. This strategy not only aids in reducing your tax burden but also helps in rebalancing your investment portfolio to align with your company's financial goals.

Charitable Contributions

Charitable contributions can be a tax-effective way to reduce taxable income. Ensure that these donations are made to qualified organizations, and also make sure to consider other potential implications, such as the potential impact on your Section 199A deduction (if applicable).

Compliance and Documentation

Stay updated with the latest tax laws and regulations. Non-compliance can lead to penalties. Keep detailed records of all transactions, as these are crucial for tax filings and potential audits.

Effective year-end tax planning is a multifaceted process that requires a thorough understanding of your business’s financial situation, tax laws, and potential strategies. By carefully considering the above points, businesses can significantly reduce their tax liabilities, ensure compliance, and position themselves for a financially sound new year. Remember, each business is unique, and strategies should be tailored to individual circumstances. Consulting with tax professionals can provide additional insights and help navigate the complexities of tax planning.

Please consult your tax advisor to understand any potential tax planning strategies. When we face more complex situations, we often run multi-year simulations to understand the financial benefit and trade-offs of different strategies.

What Business Owners Need to Know About the Corporate Transparency Act

The Corporate Transparency Act: A Snapshot

The Corporate Transparency Act (CTA) was signed into law on January 1, 2021, as part of the National Defense Authorization Act. It introduces the Beneficial Ownership Information (BOI) Rule that applies to many domestic and foreign entities, which will take effect starting January 1, 2024. The rule mandates entities to report their beneficial owners and company applicants to the Financial Crimes Enforcement Network (FinCEN). This information will form a national registry, accessible to authorized users, to identify individuals with ownership interest and significant control over a company.

Here's what you need to know about filing a Beneficial Ownership Information Report (BOIR):

·       Corporations, LLCs, and other entities created by filing documents with a secretary of state or similar office - reporting companies - are required to submit details such as the names, dates of birth, home addresses, and ID numbers of their beneficial owners.

·       Only companies that are formed in 2024 are required to disclose details about the individuals who played a role in their formation and registration within the United States, known as company applicants.

·       Entities created before January 1, 2024, have until December 31, 2024, to file their report. Entities created in 2024 are required to file their report within 90 days of their creation. Those entities created on or after January 1, 2025, must file their initial report within 30 days of establishment.

·       Reporting companies are required to submit updated reports within 30 days of any changes to the details of their beneficial owners. Such changes requiring an updated report could include an owner moving to a new address or the appointment of a new senior officer.

·       Non-compliance and provision of false information incur substantial penalties including $500 per day until the violation is solved (capped at $10,000) and/or imprisonment of up to 2 years.

Businesses must be prepared to report accurate information on beneficial owners and company applicants, and to promptly update this information as changes occur. Now’s the time to establish a plan for timely reporting! Please contact us for any questions you may have regarding this legislation, and how it may apply to you. We plan on helping our clients comply with these new requirements and will be prepared to help you get compliant in 2024!

We have partnered with Secure Compliance (which Paul Freidel co-founded) to offer technology solutions both for our firm and for our clients in this area. Visit www.securecompliance.us to learn more about the CTA.