Income tax rates will be lower next year than this
year. In most cases there will be a tax
benefit in shifting — deferring — some of your 2002 income to next year. This strategy is often overlooked, yet can
result in hundreds of dollars, if not thousands in tax savings.
Self-employed persons typically defer income to next year by
delaying billing for 2002 work until 2003.
Employees may defer income by arranging in appropriate cases to have
bonuses or other special compensation items paid in 2003. Investors can defer capital gains income by
postponing sales to next year though such a move wasn’t created by the 2001 Tax
Act's rate cuts since capital gains rates weren't changed.
You get the effect of income deferral by accelerating into
2002 itemized deductions that would otherwise fall into 2003. Examples include: prepayment of state and
local as well as real estate taxes that would be owed for the current year
anyway, but are usually paid as a fourth quarter estimate at the beginning of
the following year, charitable contributions and investment advisory fees.
Deferrals don’t always work.
Deferral may not work in the following situations:
alternative minimum tax (AMT) can frustrate some deferral moves. One case is where taxable ordinary
income is deferred leaving a higher proportion of tax preference and
adjustment items to be hit by AMT.
Another is where too much state income tax (not deductible for AMT)
- Time value of
money. The more cash income you
defer (through postponing income or accelerating deductions), the less
money you have working for you now.
Make sure the payoff from deferral (the taxes saved) is worth it.
tax. Deferring income from 2002 to
2003 may not mean postponing tax payment for a full year. Remember quarterly estimated tax
obligations for taxes not collected by withholding still need to be paid
in a timely manner.
During year-end tax planning, one should explore the issues
of deferral and its possible drawbacks:
(1) which items to defer and how to
(2) AMT, and
(3) the real payoff after
time-value-of-money and estimated tax considerations.
For further information, contact Louis P. Stanasolovich, CFP™
at (412) 635-9210 or mailto:firstname.lastname@example.org