What is Reverse Tax Planning? Normally this focuses on reducing taxable income and taxes. Reverse tax planning does the opposite and may actually increase taxes. Why is this a good thing?
If someone is usually in a high tax bracket and experiences an off year in which taxable income is low, then it means there is opportunity to use lower tax brackets. Reverse tax planning focuses on using the lower tax brackets so they don’t go to waste!
I have heard from many of you looking for more reverse tax planning tips, because you will have lower taxable income. So, here they are!
– 5 Reverse Tax Planning Tips –
#1 – Consider Your Tax Elections. Usually the goal in tax planning is to take advantage of all tax elections that give you more deductions sooner. With reverse tax planning, you may want to pass on some of these elections. For example, Section 179 can provide a huge tax write-off. In a year with low taxable income, a huge write-off provides less in tax savings than if the deduction is taken when taxable income and marginal tax rates are high.
#2 – Move Deductions to Next Year. Before you write that next check that is a tax write-off, ask yourself if that expense can be deferred to next year without any consequences? If it can, then hold off on writing that check until the next year. This works if you are a cash basis taxpayer. If you are an accrual basis taxpayer, as some businesses are, then hold off on incurring expenses until next year.
#3 – Move Income to This Year. Call those customers who owe you money! If you are a cash basis taxpayer, collecting accounts receivable before the end of the year can be an effective way to increase your taxable income. If you are an accrual basis taxpayer, then you need to close some sales before the end of the year to increase your income. If this income goes into next year, it could mean your lower tax brackets this year go unused and the income ends up in a higher tax bracket next year.
#4 – Take Advantage of Income Limitations. Many taxpayers lose tax benefits because many tax benefits phase out when income reaches a certain amount. So in a year when your income is lower than usual, you may be able to take advantage of some of these tax benefits. These tax benefits include education credits, tuition deductions, rental real estate losses, medical expenses, miscellaneous itemized deductions, and many, many more. This may be the year to make sure you qualify for these tax benefits!
#5 – Plan Your Taxes for Next Year. The end of the year is a great time to start planning your tax strategy for next year. This is especially true with reverse tax planning since income and deductions are being moved in and out of the next year.