|NELSON & COMPANY, P.S.
Certified Public Accountants
Tacoma Mall Office Building
4301 South Pine Street, Suite #241
Tacoma, Washington 98409-7205
E-MAIL TAX BULLETIN
|NELSON & COMPANY,
CERTIFIED PUBLIC ACCOUNTANTS
253-752-9522 | 1-800-669-0137
|The end of the year has traditionally been a time for
taking stock. And thatís as true for taxes as for anything else.
By this time, you should be able to estimate what your income will be for 2004 and be able to make an educated guess what your income will be for 2005.
Year-end tax planning primarily involves tax deferralóthat is, finding ways to legitimately shift income from this year to next, to postpone the tax. This gives you, rather than Uncle Sam, the use of your tax dollars for another year. But you donít want to overdo things. If you shift too much income forward, you may find yourself in a higher tax bracket next year, which could eat up part (or all) of the benefit you receive from tax deferral.
For example, letís say that John and Mary Taxpayer estimate that their 2004 taxable income will be around $100,000 and their 2005 taxable income will be around $110,000. That puts them in the 25% tax bracket. In 2005, the next higher bracket (28%) will begin at around the $120,000 level. So they can safely shift $10,000 of income from 2004 to 2005 without jumping into a higher bracket.
How do you shift income from one year to the next? There are a variety of techniques, typically involving some combination of income postponement and deduction acceleration. For example, individuals can time their deductible tax payments so their deductions are increased for 2004. And stock investors can time their stock sales so that the tax on their capital gain is postponed and, perhaps, reduced.
You must also keep in mind that year-end tax planning is constantly changing as new opportunities open up. For example, starting this year, many taxpayers are eligible to make tax-deductible contributions to a new type of health savings account.
If you want to know more about the various year-end tax strategies, please contact us. We can work with you to develop a plan tailored to your individual situation that can save you taxes for both 2004 and 2005.