1. Do a “test run” of business and personal tax returns – If possible, estimate your taxes by preparing 2014 tax returns using the information that you now have available. Some numbers will need to be estimated, but your financial activity for 2013 is nearly complete, and you should have enough information to produce decent estimates. The information gained by preparing test returns can help you decide on strategy and tactics to take before year’s end.
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2. Shift expenses into 2013 – Plan your spending. Entrepreneurs typically benefit from minimizing taxes by lowering reportable annual profit. If expenses are due to hit early in 2014, and your business accounts on a cash basis (as many small firms do), it might pay to incur the costs before the end of 2013. Keep in mind, however, that simply paying out cash rather than incurring a deductible expense – for example, by paying down debt rather than by purchasing office supplies – will not reduce taxes.
3. Shift income into 2014 – Likewise, if you are accounting on a cash basis and wish to reduce taxable income for 2013, consider billing your customers late or giving them an extra-long grace period for making payments, so that revenue that you otherwise would have received in 2013 arrives at your desk in 2014.
4. Utilize retirement plans – Besides the obvious need to plan for retirement, 401(k) plans and other savings vehicles can reduce both business and personal taxes. In some cases, business owners may be able to defer taxes on over $50,000 of income a year with a 401(k) plan; defined benefit plans can allow even greater tax deferrals. Utilizing retirement plans can also reduce payroll taxes. On the other hand, if you expect to be in a higher tax bracket in future years than in 2013 and you have traditional IRA funds, now might be a good time to convert at least some of the money to a Roth IRA so that the tax implications will be lower than expected in the future. Certain retirement-plan actions must be taken by the end of the year while others can wait until taxes are due in 2014. Retirement-plan related paperwork can take some time, so don’t wait until December 31st to discuss this with your accountant.
5. Give to charity – Charitable contributions can reduce your taxable income, so, if you were considering making donations next year and want to reduce this year’s taxable income consider moving them up a bit. Also, in some cases, capital gains taxes on appreciated securities can be avoided by donating the securities directly to a charity – potentially saving you significantly more on taxes than had you donated cash.
6. Sell investment losses to offset capital gains – If you have taxable capital gains consider selling investments that have declined in value to offset the gains. This year, many stocks have gone up and many bonds have gone down, so you may be able to offset stock gains with bond losses. However, don’t sell an investment that you think will do well in the future just to get the tax benefits, and don’t sell and buy back the same security quickly (as that can invalidate the tax loss).
7. Consult a professional tax adviser – Rather than waiting until 2014 to discuss what taxes you might owe, speak to your accountant now so that he or she can advise you on what steps to take to minimize taxes before the year passes and it is too late.
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(Disclaimer: I am not an accountant, and the aforementioned article is for informational purposes only. Tax laws are complicated. I make no representations or guarantees about tax law and its impact on anyone specific or on any specific situations, so, as I noted above, please consult a tax professional before making any decisions.)
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