One way to cut your tax liability is to set up a standing meeting with your tax professional before the end of the year, preferably at the beginning of the final quarter of the year. This way, you can get a list of the things you can do to get ready for tax time that isn’t happening yet.
- Use Extra Cash on Hand – As close to December 31st as possible, use whatever extra cash you have on hand for your business needs. Now is the time to use the money if it’s also a deductible expense - either for your business or on your personal taxes.
- Document Home Office Use – If you have a separate room in your home that can qualify as a home office and you’ve never used the home office deduction before, you need to get the measurements of the room. You must also state on the tax documents that you use that room 100 percent for business.
- Get Healthcare – Depending on your situation, you may be close to meeting your out of pocket max. If you need anything done, now is the time to do it. If you itemize and spend more than 10 percent of your income on qualified medical expenses, you can use that to increase your deductions.
- Defer Income – This works for people who are service providers or who bill their clients. Instead of sending your bill on time, send it the last day of the year or wait until January 1st. Many small businesses are going to want to pay their bill before the 31st of December – for the same reason you’re deferring the income - so give this tactic some thought. Note: You cannot defer income by holding on to checks. Once a check, money order, or cash is in your hand, it’s yours and accountable.
- Donate More to Your Retirement Accounts – This is one of the number one ways to lower your tax liability. This money cannot be recovered once you put it in there, but the more you can add by December 31st, the better. In some cases, you can donate up until Tax Day.
- Donate to Charity – You can donate money to charity on your personal taxes, this will lower your liability. Some taxpayers can only give up to $250 a year but depending on your bracket, whether you itemize, and other factors, you may be able to deduct a lot more.
- Pay Property or Tax Bills Early – If you owe property taxes in January, pay it by December 31st instead to get the added deduction for this year’s income.
- Renew Licensure Early – If it’s possible to act early without causing any issues with your license, buy it as soon as you can. Any fees that you can prepay at the end of the year for next year is going to help, especially if you’re on cash-basis accounting.
- Prepay Rents and Subscriptions – Sometimes you can pay your rent in advance if you rent anything. For example, if you rent part-time office space, see if you can pay in advance for the time for next year. Also, if you pay for software subscriptions or any other type of subscriptions for your business, repay by December 31st for the following year.
- Try to Avoid AMT – One issue with taking too many deductions is the possibility of triggering the alternative minimum tax. Ask your advisor if this is an issue with you. This shouldn’t affect you unless your deductions exceed the AMT exemption amounts for the year.
The main reason you need to meet every year is that things change each year due to tax laws changing. By meeting right before the last quarter, you can ensure that the things you’ve been doing, and the ideas you have, are still legitimate.
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