Don’t wait until 1099s start arriving, to begin gathering your data for filing. The top priority and most important tax-planning advice is to file as early as possible to avoid tax-return identity theft. Have all backup data possible in early January so that when 1099s do arrive, you are ready to file.
One of the most important things you can do right now is to get a handle on a good, solid estimate of your current year’s tax liability. Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. Estimated tax payments are due the 15th of April, June, September and January.
If you don’t pay enough withholding and estimated tax payments, you may be charged a penalty for underpayment of estimated tax. In order to avoid an underpayment, each quarter you must pay 25 percent of the following: 90 percent of the current year’s tax liability, or 100 percent of the prior year’s tax liability (110 percent if you are married and make more than $150,000 per year, or if you are single and make more than $75,000 per year).
If you find that you have not paid enough to avoid penalties in the first few quarters, you may want to increase withholdings from income, such as your salary or a pension. Withholding is considered paid evenly throughout the year, even if it’s done later in the year, so it is a good tool to help reduce or avoid penalties.
After you have a handle on what your tax picture looks like right now, you can look at ways to potentially reduce taxes. There are various strategies that can be employed to either reduce or defer your taxes, and a few are discussed below.
Accelerating deductions/postponing income. If you believe that you will be in a lower tax bracket in 2018 than you were in 2017, these strategies may work for you. Some steps to take to accelerate deductions include making any anticipated 2018 charitable contributions in 2017 and prepaying your property and state income taxes. Although you can’t deduct prepaid interest, you can pay your January mortgage payment in December, because the interest due in January is interest due on December’s loan balance.
Another option would be to sell some investments that have created a capital loss. You can take a net loss of $3,000 each year against ordinary income, with any excess being carried over to future years. If you own a business that has excess cash on hand, consider whether there is a need for any large purchases (think equipment or vehicles) that you may be able to expense in the current year.
On the income side, if you have any control over when a bonus or other income will be paid, put it off until January. If you are a cash-based business owner, delay billing a customer until 2018. Seriously consider maximizing that 401(k) plan contribution. Starting now, instead of in December, gives you more time to spread those deductions over multiple pay periods.
This strategy not only takes advantage of reducing taxable income in a high-bracketed year but also could bring you below some income thresholds that limit itemized deductions, disallow certain credits or subject you to the Net Investment Income tax.
Accelerating income/postponing deductions. If your income in 2018 is expected to put you in a higher bracket, these strategies may work for you. One step to take to accelerate income is to take that bonus now (or before year-end). Or take any planned retirement distributions (if not subject to the 10 percent penalty). You could also sell some investments to take some of those profits or accumulated long-term capital gains.