How Your Clients Can Reduce Their Tax Bills by Half

Your clients are always looking for ways to reduce their tax bills. In his latest column, tax guru Julian Block explains exactly how this can be achieved. It's simpler than you might think.

Jun 25th 2020
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Want to cut your tax bill for this year and next? The main thing is to act—or not act—before Dec. 31, while there’s still time to select and implement strategies that can generate substantial savings. Once we’re beyond Dec. 31, it’s generally too late to do anything but file Form 1040 on the basis of what took place the preceding year.

A few exceptions. For instance, early in the year, you can still make deductible contributions to some tax-deferred retirement accounts, such as traditional IRAs, SEPs (simplified employee pension plans) and other plans that reduce taxes for the prior year.

What should you do before year-end? There’s the obvious: Aim to make maximum contributions to your employer’s 401(k) or 403(b) plan. But you should also think about whether your tax bracket will be higher or lower next year—and hence whether you want to shift taxable income or deductions into next year or generate them this year.

An example. Long-standing rules allow individuals who buy EE savings bonds to postpone reporting the interest income until they cash in the bonds or the bonds mature. Another break is that the interest is exempt from state taxes—a real advantage for those in high-tax states like California, Connecticut, Hawaii, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont.

This option to defer provides savings bond owners with some valuable leeway in reporting their interest. With careful planning, the deferral can become the equivalent of an exemption from taxes.

Let’s say middle-incomers John and Blanche Bickerson expect to fall from the 22% bracket for 2020 (taxable income between $80,251 and $171,051) to the 12% bracket for 2021 (yet-to-be-announced taxable income between around $20,000 and $80,500).

Why the descent to a lower bracket in 2021? John or Blanche might no longer moonlight at a second job, or perhaps they decide to take early retirement.

They mention their intention to redeem some EEs and use the accumulated interest for their spring vacation. I remind the couple that when they redeem hurts or helps.

Suppose they pay no attention to the calendar and remove $5,000 of the accumulation before Dec. 31. The IRS helps itself to $1,100—or 22%—and the couple keeps $3,900.

Suppose they bide their time until after Dec. 31. The IRS’s share decreases to $600, or 12%, and their vacation kitty increases to $4,400.

Timing the redemption of savings bonds is just the beginning. There’s a host of ways to shift taxable income from one year to the next.

Got a winning stock you want to sell or a tax loss you want to realize? Contemplating a large charitable contribution? Are you a freelancer who plans to buy a new laptop that’ll count as a deductible business expense? Do you have customers you need to bill? Whether to select and implement strategies this year or not depends on whether you expect 2021’s tax bracket to be higher or lower.

My advice to clients: Claim all tax breaks to which they’re legally entitled. In my experience, they shouldn’t let the possibility of IRS scrutiny cause them to put the brakes on breaks that can significantly lessen the amount siphoned off for income taxes.

Back in 1947, when tax planning was something that concerned only the wealthy, they received these often-quoted words of encouragement from Judge Learned Hand of the Second Circuit Court of Appeals in New York: “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right; for nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

Consistent with that kind of reasoning, U.S. Supreme Court Justice George Sutherland commented, “The legal right of a taxpayer to decrease his taxes or to altogether avoid them by means which the law permits cannot be doubted.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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