I am busy performing tax planning services this time of year for clients. This usually involves putting a projection together based on the client’s income and deductions for the past 10 or 11 months, plus an estimate of income for the final part of the year. This baseline projection lets the client know roughly their tax burden. Then we run an alternate scenario or two to tweak the numbers to determine the most tax-efficient options for the client’s consideration. Some of the more common tax planning strategies are listed below.

The first step is always understanding the tax bracket based on the initial net income projection. Most of the time, we are trying to figure out ways, within the rules, to reduce the tax burden for a client. Sometimes, however, we want to increase taxable income to take advantage of a lower tax bracket rate. This is frequently where Roth conversions come in as a strategy. Once we have that initial projection, we can discuss ways to adjust the number.

Most individuals and small businesses that I work with are cash basis taxpayers. This means that income and expenses are recorded when paid/received rather than when earned. As a result, after we get a handle on what the projected net income looks like, I often have conversations with business clients about prepaying some expenses or purchasing equipment (which can be fully written-off), or waiting a few extra days to take the year-end deposit to the bank. These are common ways to reduce the net income in that initial projection.

Another common strategy for small business clients to reduce their taxable income is to make a retirement plan contribution. A SEP plan, for example, allows you to contribute roughly 20% of the net income from your business as a retirement plan contribution. This retirement plan contribution is a deduction that reduces your tax burden.

For individual clients, we often discuss the standard deduction amount versus their projected itemized deduction. This is where year-end charitable contributions can come into play. If the client has year-to-date taxable capital gains, we often encourage the client to take the opportunity to rebalance their portfolio by selling some losers to offset those gains. If the client hasn’t yet taken advantage of their HSA or their pre-tax dependent care account with their work, we usually encourage them to do so before the opportunity is lost on December 31.

The recommendations are specific to the client’s situation, but hopefully, the above guidance gives you a general idea of some of the common year-end tax planning strategies.