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Tax Planning Tip: Pay Attention to Timing

A common misconception about tax planning is that it consists primarily of making sure to claim all the deductions and credits for which you are eligible. That’s important, no doubt. But there are often additional savings to be had from figuring out the best time to claim your deductions. And the same goes for income.

Of course, you often have no choice in the matter. For example, if you receive a certain amount of wages this year, you cannot simply choose to include those wages in next year’s taxable income rather than this year’s.

But sometimes you do have a choice. And when the timing is up to you, you should put some serious thought into it.

Capital Gains and Losses

Capital gains and losses provide many opportunities for timing strategies, because you get to choose when you sell your investments.

Most obviously: It’s often a good idea to wait until a gain is a long-term capital gain before realizing it, thereby allowing you to take advantage of the lower tax rate. And if you’re selling your home for a gain, if it all possible, you’ll want to wait until you’ve qualified for the exclusion.

Less obviously: As we recently discussed, it is often advantageous to separate capital gains and losses into different years if doing so a) doesn’t cause any other problems and b) allows the losses to offset ordinary income rather than long-term capital gains.

Bunching Itemized Deductions

If in most years you fall just short of being able to itemize your deductions, there may be an opportunity to achieve savings by bunching up your deductions every other year.

For example, if you are married filing jointly and your normal itemized deductions include $6,000 of state and local income taxes, plus a $5,000 charitable contribution to your favorite non-profit, the $11,000 total isn’t going to do you any good. You would just claim the standard deduction ($12,200 for 2013) instead.

However, what if, in 2013, instead of making your normal $5,000 charitable contribution, you kept that money in your checking/savings and made the donation in January of 2014? In that case, you could claim the standard deduction in 2013, and in 2014 you would be able to benefit from itemizing because you’d have $16,000 of itemized deductions ($6,000 state and local income taxes, plus two $5,000 charitable contributions).

And you could run through the same routine every two years: no donations in odd-numbered years and double contributions in even-numbered years.

Changes in Tax Brackets

Whenever you find yourself in a higher-than-normal tax bracket (e.g., due to a large bonus that is unlikely to be repeated next year), you should check to see if there are any deductions that you can accelerate into this year. For example:

  • If you have any healthcare procedures that you’ve been putting off, and you do not ordinarily max out your HSA or FSA, now would be a good time to bump up those contributions and go ahead and get the procedure done, or
  • If you itemize, consider making next year’s charitable contributions this year.

And conversely, in years in which you’re in an unusually low tax bracket, it’s worth considering what opportunities you have for recognizing income this year that would otherwise be recognized in a later year. For example:

  • Roth conversions often make sense in years in which your taxable income is temporarily-low (e.g., after retiring but before Social Security kicks in).
  • Or, if you’re ordinarily in the 25% tax bracket or above, and you temporarily find yourself in the 15% tax bracket or below, that would be a good time to realize some long-term capital gains to take advantage of the 0% tax rate.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions, exemptions, and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Comments

  1. Thanks for the excellent advice on tax planning. I’m good at the mechanics (finding all deductions, credits, etc.) of doing taxes, but weak in tax planning.

    Does your tax book cover this in detail? I notice that I can’t see the Table of Contents in the Look Inside feature of Amazon. It would be nice if you added those pages.

  2. rjack,

    The book is a very high-level introduction to income taxes in general — what all the terms mean, eligibility requirements for various deductions and credits, etc. It would probably not be a good fit for your needs.

    Unfortunately, I don’t have any great alternative suggestions, as I haven’t seen any such books come out in the last couple years. And anything more than a couple years old is, in my opinion, going to be more trouble than it’s worth given that you’d have to constantly be checking which pieces of information are still accurate.

    Perhaps the best suggestion is to keep up to date with various tax-related blogs. Two of my favorites are “TaxGirl” and “Don’t Mess with Taxes.”

    As to the “Look Inside” feature, that’s up to Amazon, not the publisher. As far as I can tell, it’s just an automated algorithm that decides what to show.

  3. Thanks! I will do add those blogs to my blog list.

  4. On your final note above I would just add that even if you’re in the 15 percent bracket or below it may not be a good idea to realize gains if you have carryover losses. Your earlier statement of saving losses to adjust income instead of gains still applies.

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