What is Reverse Tax Planning? Normally this focuses on reducing taxable income and taxes. Reverse tax planning does the opposite and could actually increase taxes. How come Tax Planning Summertown ?
If someone is normally in a higher tax bracket and experiences an off year where taxable income is low, then this means there is opportunity to use lower tax brackets. Reverse tax planning focuses on utilizing the lower tax brackets so they don't go to waste!
I have heard from many of you searching for more reverse tax planning tips, as you will have lower taxable income. So, here they are!
- 5 Reverse Tax Planning Tips -
#1 - Consider Your Tax Elections. Usually the target in tax planning is to take advantage of all tax elections that provide you more deductions sooner. With reverse tax planning, you may want to pass on a few of these elections. For instance, Section 179 can provide an enormous tax write-off. In a year with low taxable income, an enormous write-off provides less in tax savings than if the deduction is taken when taxable income and marginal tax rates are high.
#2 - Move Deductions to Next Year. Before you write that next be sure is a tax write-off, consider if that expense could be deferred to next year without the consequences? If it could, then postpone on writing that check before next year. This works if you are a cash basis taxpayer. If you are an accrual basis taxpayer, as some businesses are, then hold off on incurring expenses until next year.
#3 - Move Income to This Year. Call those customers who owe you money! If you're a cash basis taxpayer, collecting accounts receivable before the end of the entire year is definitely an effective way to boost your taxable income. If you are a accrual basis taxpayer, then you have to close some sales prior to the end of the entire year to increase your income. If this income goes into next year, it could mean your lower tax brackets this season go unused and the income results in a higher tax bracket next year.
#4 - Take Advantage of Income Limitations. Many taxpayers lose tax benefits because many tax benefits phase out when income reaches a quantity. So in per year when your income is lower than usual, you may be able to take full advantage of many of these tax benefits. These tax benefits include education credits, tuition deductions, rental real estate losses, medical expenses, miscellaneous itemized deductions, and several, many more. This can be the year to ensure you be eligible for these tax benefits!
#5 - Plan Your Taxes for Next Year. The finish of the year is a wonderful time to start planning your tax technique for next year. This is especially true with reverse tax planning since income and deductions are increasingly being moved in and out of the next year.