John Gallo, CPA

It is getting late in the year and if your income is coming in a little bit higher than you expected you may want some ideas of things you can do to reduce your upcoming income tax liability. There are lots of individual situations out there, so I will throw out several ideas which will cover a variety of potential situations starting with business related situations. I am assuming that you figure your income and pay your taxes on a calendar year basis. Check with your tax advisor regarding how any of these items may affect your individual situation.
• Buy supplies. Small supplies used in your business are deducted as you spend the money, so stock up on items you will use over the next few months. Note that inventory you hold for resale is not deductible until the year you sell it.
• Prepay business insurance. If you pay your insurance by the month, you can prepay up to 12 months and deduct the amount in the year paid.
• Prepay rent. You can deduct prepaid rent as well.
• Buy new equipment for your business so you can take advantage of the section 179 deduction of up to $500,000 for 2011. You must place the equipment “in service” by December 31. For items such as computers, that means you must take it out of the box and I would recommend turning it on and attaching it to your network if applicable. For items such as large equipment which requires installation, it must be installed. This does not apply to rental property.
• Postpone invoices. If you pay taxes on the cash basis, you do not have to pay tax on amounts your business billed until you actually receive payment. If you wait until the last week of the year (or even after the end of the year) to send out invoices, you are not likely to be paid until next year.
• Max out retirement plans or HSA plans. You can probably put more in to these plans than you do on a monthly basis. The money put into the plans earns income tax free and reduced your taxable income this year.
• Prepay your state income taxes. The prepayment or overpayment of state income taxes are deductible in the year paid and can reduce your federal income taxes. This could be negated by the alternative minimum tax, so watch out for that effect.
• Prepay your property taxes. Again, these are deductible in the year paid. Note that prepaying expenses may reduce your available deductions for next year, so consider which year you may have higher income when prepaying items.
• If you are planning some charitable contributions consider making them prior to year end.
• Note that any expenses paid via your credit card are deductible in the year charged rather than the year paid even if you are on the cash basis.
• If your investment account has some losers in it that you do not think will recover, you should probably sell them. You can sell them to offset any gains you have for the year and can deduct up to $3,000 of losses against ordinary income. Losses of more than $3,000 are carried forward into future years.
• Fund a college savings 529 plan. This is smart planning for the future and the amount is deductible for state income taxes (not federal) and the income is not taxable.