Tax Tips: It's Never Too Early to Start Planning!
by Edward Poll
(County Bar Update, September 2001, Vol. 21, No. 8)

 

Tax Tips: It's Never Too Early to Start Planning!

By Edward Poll, J.D., M.B.A., CMC. Poll is a member of the Law Practice Management Section Executive Committee. He is a certified management consultant in Los Angeles who advises attorneys and law firms on how to deliver their services more effectively while increasing their profits at the same time. The opinions expressed are his own. He may be reached at (800) 837-5880 or edpoll@lawbiz.com.

Here are some thoughts about new-year and year-end tax planning. It's never too early!

  • Set a pattern for yourself by thinking longer term (more than one year) to enhance your net cash flow. For example, the general rule is to defer income when legally permissible from one year to the next (and forever, if possible!) because you will be paying with "cheaper" dollars and because, in the meantime, you will earn interest (cash or opportunity income) on the sum you can pay later instead of today.
  • But if your income is expected to be larger next year, you may want to accelerate all the income permissible in the current year rather than delay its recognition. Pre-year-end tax planning is essential to optimizing your net cash flow and the lowest permitted taxable income.
  • Take capital losses this year if you have high taxable capital gains this year. This can be a tricky area. Also note that you don't have a loss until you sell; if you expect the asset to increase in value in the future, you may want to hold on.
  • Accelerate expenses. In the past, the IRS permitted the acceleration of more deductions (payments today for services to be delivered or obligations to be met next year). This is clearly one of the most often overlooked tax planning steps. It's simple yet greatly ignored.
  • Some itemized deductions may be paid in one year as opposed to the next. For example, review your charitable contributions, state and local taxes and mortgage interest expenses. You may be in better shape if you pay your January mortgage payment early enough to get the mortgage company to include this payment on your form 1098. If it doesn't, you may have a difficult time justifying a larger deduction ... and, in any event, you may open yourself to an IRS inquiry, something no one wants.
  • Donate appreciated assets held more than one year. There is likely to be no tax on the gains, and you get the fully appreciated value of the asset as a deduction. This is a complicated area but one that may result in tax benefits and is worthy of consideration.
  • Consider timing your billing statements to defer receipts until the next year. This is one piece of advice that I almost never give and certainly don't advocate except in the most secure client relationships. If there is any concern about getting paid -- or expecting a delay in payments -- be sure to bill on time, if not early. I'd rather take the "sure income" (and include in my taxable income) than make the receipt "unsure" by virtue of delaying my billing. The tax benefit would never be so great as to cause an uncertainty in the ultimate collection of the billing.

Finally, these comments are intended to be general in nature. Be sure to consult with your expert tax adviser before you take any action. And, as in everything I advise, planning is the key element. To quote one of my heroes, John Wooden, former coach of great UCLA basketball teams, "If you fail to plan, you're planning to fail!"

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