Wrap It Up Right Like your holiday packages, year-end finances are all about presentation--and planning.
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Like most things in life, year-end tax planning can getcomplicated if you let it. But it doesn't have to be. Thesimplest form of planning involves nothing more than deferringincome into next year and/or accelerating deductions into thisyear. The self-employed generally have an easier time switchingthings up a little in the weeks before New Year's Eve, too.
Pushing income, and the tax that goes with it, into the futuresounds reasonable enough. It's not hard, either. You couldarrange to have your compensation or annual bonus paid in Januaryinstead of December. Or, if you're retired instead of working,you may want to hold off on December's retirement-accountwithdrawal until you're done humming along with that laststanza of "Auld Lang Syne."
Similarly, it's intuitive that you'd want to maximizeyour deductions sooner rather than later. The old chestnut piece ofadvice is to prepay your January mortgage interest in December, butbusiness owners can sometimes do more. Need a new computer in thehouse to keep up with the business? Make it a holiday gift ratherthan buying next year. Thinking about a company car? Same thing. Ifyou'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, takea few minutes to think about the impact beyond this year'staxes. Most important, is your tax bracket likely to be differentnext year? If you expect to earn more next year than thisone-especially if the difference is enough to push you into ahigher bracket-deferring income is probably a bad idea. Similarly,don't accelerate deductions into 2004 that you might need tooffset more heavily taxed income in 2005.
Meanwhile, keep in mind that shifting income around can haveother consequences. If you push the income too low in one year andtoo high the next, you might find you've trimmed or eliminatedyour ability to make deductible IRA contributions, or that otherwrite-offs have been phased out. The alternative minimum tax canalso come into play if you're not careful.
There are plenty of other year-end tax tips that accountants andfinancial planners can tell you about. Things might getcomplicated, but deferring income and accelerating deductions arerelatively simple. Just remember to look before you leap-lookat the likely impact both this year and next.
Scott Bernard Nelson is deputy business editor at TheOregonian and a freelance writer in Portland, Oregon.
