I receive many queries about taxes. Most of the questions people send are usually about the same topic: They want my advice on how to lose less to the IRS.
Most of the answers I send back are pretty much the same: I advise them to plan ahead and stay on top of changes to the law.
There’s something I’ve repeatedly learned in the course of four-plus decades of dispensing advice on how to render less unto Caesar: The only time most of us think of doing something about our federal income taxes is once a year—the hours we spend actually grappling with Form 1040 or gathering records to deliver to paid preparers.
What we should do is make tax planning a year-round concern and position ourselves to take full advantage of the many opportunities that are available to lessen the amount siphoned off each year by the IRS. The savings can amount to many thousands of dollars.
Let’s say you have income from freelancing. The IRS requires most freelancers and other self-employed individuals to use the cash method of accounting, under which income isn’t counted until cash, a check or an e-payment is received, and expenses aren’t counted until they’re paid.
How does the IRS apply that requirement to a hypothetical freelancer I’ll call Phyllis Neff? Like most others, Phyllis has a good deal of flexibility on whether to report income or deduct expenses in 2018 or 2019. As part of her end-of-year financial planning, she should review perfectly legal tax-trimming tactics that must be taken by Dec. 31 if she doesn’t want to lose them forever.
Let’s suppose Phyllis anticipates that 2018’s income from freelancing and other sources, together with the resulting tax tab, will be higher than 2019’s. Possible reasons for descending to a lower bracket for 2019: Phyllis is expecting a baby and scales back on assignments; she or husband Walter no longer moonlight at a second job or decide to take early retirement; or they move out of a state with a high income-tax rate into one with a low rate or without any tax at all, as in the case of a California-to-Texas transfer.
The traditional advice for Phyllis: Push the receipt of 2018 freelancing income past New Year’s Eve by delaying end-of-year billings until after Dec. 31 or bill clients so late in the month that payment this year is unlikely. On existing invoices, don’t press for payment of money owed in 2018, provided that tactic doesn’t jeopardize collection.
As for business expenses, pay them in 2018, rather than deferring payment until 2019. Similarly, wait until 2019 to realize profits from sales of stocks or other investments, unless losses from other sales will be available to offset gains realized in 2018. The reward for Phyllis’s attention to timing: She’ll keep money in her pocket and out of the IRS’s till—which is, after all, what tax planning is all about.
What if Phyllis anticipates a significant increase in next year’s top tax rate? The traditional advice: Do exactly the opposite. Possible reasons for ascending to a higher bracket in 2019: She switches from freelancing to a job that pays a good deal more; Walter returns to work after a jobless period; or they move out of a state with a low or no tax rate to a state with a high one, as in the case of a Texas-to-California move.
In these scenarios, it pays for Phyllis to accelerate income from 2019 into 2018, while she’s still in a lower bracket. Similarly, she should delay the payments of as many deductible business expenses as possible until 2019, when write-offs will give her greater tax savings.
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 250 and counting).
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...