When it comes to thinking about taxes, December trumps April every time. In April, your focus is primarily on minimizing the tax consequences of the previous year, but in December you have the luxury of thinking about the big picture. By December, you should have a pretty good understanding of your tax liabilities for the current year, while being well positioned to assess the factors that will affect your taxes during the next 12 months. Having this multiyear perspective is critical, because the tax decisions you make this year may have implications for the taxes you will be liable for in the future.
A prime example of this is deciding to defer income for 2008 and accelerate deductions. The idea behind this strategy is simple: thanks to inflation, the dollar you divert from taxes this year is worth more than the dollar you pay to the IRS in the next.
There are a multitude of strategies you can use to minimize your income. For instance, if you can sell a property, you should consider taking payment in installments. Each installment would be taxable income only in the year it is received. Another strategy that most investors this year should consider is harvesting their capital losses. The limiting factor here is that you can deduct capital losses only up to the amount of any capital gains you'll have during the year, as well as an additional $3,000 of losses against your other income.
There are many legitimate ways to take deductions this year rather than next. For instance, if you are counting on charitable contributions for a deduction but are short of cash, you can charge the contribution to a credit card. The contribution is deductible in the year charged, not when you pay off the card.
Seniors also have a number of special deductions available to them. If you've reached age 70, you can transfer up to $100,000 of otherwise taxable IRA money (including your required minimum distribution) to specified tax-exempt charities. As long as you make the transfer directly from your IRA to the charity, such a transfer will not be taxed by the federal government. There are, of course, pluses and minuses to consider. You will not be able to claim your contribution as an itemized deduction, but it may reduce your Social Security benefits subject to tax.
Reducing Your Adjusted Gross Income
By minimizing your income and maximizing your deductions, you are reducing your adjusted gross income (AGI)—and therefore reducing your taxes. Lowering your adjusted gross income may also put you in the position to take advantage of tax breaks that are only available to taxpayers whose AGI is below certain levels.
Because putting together tax strategies for 2008 and 2009 involves balancing a number of considerations, it may be a good idea to schedule a December appointment with a professional before making any decisions.
For definitive information for seniors on preparing your tax return, download Publication 554 from the IRS Web site.
*This article should not be treated as tax advice. All residents, potential residents, and family members should consult their own tax advisor for more information.