Give your clients a holiday tax planning gift

Now that we are almost at the end of the year, your clients are probably asking questions about what they can do now to save on taxes before year end. Although there are a breadth of tax planning and tax saving strategies, there are three aspects of tax planning we will focus on: deferring income, shifting income, and donation planning strategies.

Deferring income 

The first step in minimizing income is not recognizing it in the current taxable year. The goal is to delay and push the income tax liability to a future year, which can allow your client to keep those taxes they would have paid in their bank for another year. The simplest example of this is contributing to a traditional 401(k), SEP, or traditional IRA. The taxpayer gets a deferral of income in the current year, and the account will grow tax-free in future years. 

Another reason to defer income is that your client may be in the highest tax bracket this year, but next year they expect a major loss to show up on their tax return. By deferring income to a future year, your client can push the income to a year that will have a loss and potentially a lower tax bracket. 

For businesses that have a cash basis of accounting, income is recognized when it is received and expenses are recognized when they are paid. The best practice for cash-basis taxpayers before year end is to defer income and accelerate expenses. Deferring income could look like deciding to invoice clients in January of the following year instead of December of the current year. This would ensure that invoices would be paid in the following year. A practitioner could also encourage their clients to accelerate deductions and prepay bills in December. 

Shifting income 

Shifting income is the practice of moving unearned income from one taxpayer to another. The ideal situation is when income from parents is shifted to someone else in a lower tax bracket. This practice is usually done from an investment or a business, and is most common among family members.

If you have a client who has a business, one way of income shifting is through hiring the dependent to work in the business. The parents get a deduction at the entity level and the child gets to report the income at their lower tax bracket.

Another way of shifting income to children is through the Uniform Transfers to Minors Act (UTMA), which would require gifting securities to your dependents. It must be noted that these gifts could be subject to a potential gift tax filing. For 2022, the gift tax limit is $16,000 per person ($32,000 if a married-filing joint couple gifts to an individual). In addition, if the child is a dependent, then the income could be subject to kiddie tax rules, depending on how much the income on the investments gifted to them are making each year.

Donation planning 

If an individual wants to do any year-end giving, consider looking at donating appreciated stock before cash. Cash donations are usually done with after-tax funds, buy donating appreciated stock saves the taxpayer two ways:

• It saves the taxpayer money because they do not have to pay capital gains on the donation. Instead, the taxpayer can deduct the fair market value of the donation on Form 8283, Noncash Charitable Contributions, without having to sell the asset and pay taxes when it’s converted to cash.
• If there are stocks that depreciated in value, it might be a good practice to sell those assets at a loss and then contribute those proceeds to charity. This way, your client is offsetting any capital gains (and ordinary income up to $3,000) and taking a charitable contribution for the donation.

Offer proactive tax planning

Tax planning clients are normally the higher-value clients a firm will have, because they see your value in advisory, not just compliance. Therefore, it’s important to continue to nurture and build these relationships by offering tax advisory services, including proactive tax planning. The tax-saving strategies are what your clients are looking for when they hired you as their tax advisor. And if you save them thousands of dollars before year end with your strategies, you are likely to charge more for your services and build better trust.