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Wrap It Up Right

Like your holiday packages, year-end finances are all about presentation--and planning.
Magazine Contributor
3 min read

This story appears in the December 2004 issue of Entrepreneur. Subscribe »

Like most things in life, year-end tax planning can get complicated if you let it. But it doesn't have to be. The simplest form of planning involves nothing more than deferring income into next year and/or accelerating deductions into this year. The self-employed generally have an easier time switching things up a little in the weeks before New Year's Eve, too.

Pushing income, and the tax that goes with it, into the future sounds reasonable enough. It's not hard, either. You could arrange to have your compensation or annual bonus paid in January instead of December. Or, if you're retired instead of working, you may want to hold off on December's retirement-account withdrawal until you're done humming along with that last stanza of "Auld Lang Syne."

Similarly, it's intuitive that you'd want to maximize your deductions sooner rather than later. The old chestnut piece of advice is to prepay your January mortgage interest in December, but business owners can sometimes do more. Need a new computer in the house to keep up with the business? Make it a holiday gift rather than buying next year. Thinking about a company car? Same thing. If you're going to buy something business-related, in other words, buy it now rather than in January or February.

But before making any decisions about income or deductions, take a few minutes to think about the impact beyond this year's taxes. Most important, is your tax bracket likely to be different next year? If you expect to earn more next year than this one-especially if the difference is enough to push you into a higher bracket-deferring income is probably a bad idea. Similarly, don't accelerate deductions into 2004 that you might need to offset more heavily taxed income in 2005.

Meanwhile, keep in mind that shifting income around can have other consequences. If you push the income too low in one year and too high the next, you might find you've trimmed or eliminated your ability to make deductible IRA contributions, or that other write-offs have been phased out. The alternative minimum tax can also come into play if you're not careful.

There are plenty of other year-end tax tips that accountants and financial planners can tell you about. Things might get complicated, but deferring income and accelerating deductions are relatively simple. Just remember to look before you leap-look at the likely impact both this year and next.

Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.

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