Maybe You Should Have an S Corporation – A Tax Planning Discussion

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Who May Benefit

This article may benefit you if:

  1. Your income is over $157,500 ($315,000 if married filing jointly),and
  2. You are:
  • Self-employed, or
  • A partner in a partnership or a member of an LLC that is taxed as a partnership

Suggestion: You may spare yourself some reading by jumping to the two examples I provided below.

Overview

The tax changes in 2018 include some provisions that are very favorable to businesses. One important change was to drop the tax rate for C corporations to a flat 21%. This is a significant reduction, but doesn’t apply to businesses that operate as partnerships, LLCs, S corporations or sole proprietorships.

To provide a similar benefit to these businesses, the IRS introduced Section 199A Qualified Business Income deduction. This allows individuals with income from businesses that operate as partnerships, LLCs, S corporations or sole proprietorships to take a tax deduction of 20% of their share of Qualified Business Income (QBI)… But there are rules, definitions and restrictions:

The rules and restrictions include a phase-out of the deduction, when your income exceeds certain thresholds. BUT these restrictions are reduced or eliminated if your business has W-2 payroll expenses or substantial investment in qualified assets.

S Corps are required to pay a reasonable W-2 salary to their owners, but partnerships, LLCs and sole proprietors cannot. That’s why you may want to form an S Corp.

Why is the QBI Deduction Important?

You can take a tax deduction of up to 20% of the net income generated by your business. It can be a very big deal.

What is QBI?

Qualified Business Income is the income from your trade or business.

There are no restrictions on the types of businesses income that qualify for the QBI deduction, as long as the idividual claiming the deduction has taxable income under $157,500 (or $314,000 if married filing jointly). For those with higher taxable income, you will not be able to claim the deduction if you are in a Specified Service Business, as described below.

QBI is not intended to include income from personal services, so it specifically excludes employment income, as well as income from Specified Services Businesses – in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletic, financial and brokerage services. Engineers and architects, however, are eligible for the QBI deduction. Speak to your tax professional for a more thorough and complete discussion of your eligibility.

Owners of rental properties may also qualify for the QBI deduction, but the value of the properties will help you qualify if your income is above the phase-out thresholds, so the benefit of an S Corp would probably be irrelevant. And would also bring up other complex issues.

Payroll Expenses Can Save the Day

The QBI deduction phases out to nothing if your income exceeds $207,500 (or $415,000 if married filing jointly)… UNLESS your business had W-2 payroll expenses or substantial qualified assets. Let’s focus on the payroll:

If you are above the taxable income threshold, and if your income is not from a Specified Services Business, you can still claim the QBI deduction in an amount up to 50% of the W-2 payroll of the business.

Partnerships and other businesses may have employees, and their wages would count in this calculation, but many businesses don’t pay any W-2 wages at all, so they would lose the QBI deduction. Certainly, sole proprietors and partners in partnerships can’t pay themselves salaries… BUT S Corps can.

Example 1 – Sole Proprietor

A real estate broker operating as a sole proprietor earns $275,000 from his business activities, and reports his income on Schedule C of his tax return. He is not married, so he will pay tax on the entire $275,000. His income is over the threshold, so there is no QBI deduction.

If the same real estate broker operated his business as an S Corp, he would be required to pay himself a reasonable salary – say $125,000. Ignoring a few other details, his Qualified Business Income would be $150,000 ($275,000 income, less $125,000 W-2 salary paid to him by the company). His QBI deduction would be the lesser of (a) 20% of his QBI – $30,000, and (b) 50% of the W-2 wages – $62,500.

In this case, the real estate broker gets a tax deduction of $30,000 by forming an S Corp.

Example 2 – Partnership (or LLC taxed as a partnership)

The partnership earned $400,000. Partner A owns 50%, and received guaranteed payments for his services of $125,000. His income of $325,000 ($125,000 guaranteed payment, plus $200,000 share of partnership income) is fully taxed at ordinary tax rates. He is single, so his income is too high to qualify for the QBI deduction.

If the partnership filed an election to be treated as an S Corp, his guaranteed payment of $125,000 would be paid as W-2 wages, and his QBI would be $200,000. Assuming his business partner also received the same salary, and again ignoring a few details, his QBI deduction would be the lesser of (a) 20% of his QBI – $40,000, and (b) 50% of his share of W-2 wages – $67,500.

In this case, the partner gets a tax deduction of $40,000 by electing to have the partnership taxed as an S Corp.

NOTE: Even though the deadline for S Corp election has passed, the partnership can apply for late filing relief, and there is a good possibility that the S Corp election can be made effective for 2018.

Conclusion

This is not intended to be a thorough analysis of Section 199A of the tax code. Nor is it a full discussion of the pros and cons of an S Corp. Rather, it is an attempt to find good tax planning solutions. There are a lot of variables in the choosing the most appropriate business entity, and every situation is different. I would be happy to discuss your situation, and help you arrive at the most advantageous result.

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YOUR S CORPORATION – A CHECK-UP

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In my experience, a lot of people don’t pay enough attention to their Subchapter S Corporations until tax time, when it’s sometimes too late to correct errors or oversights.

You formed the S Corp because of the benefits you would get from it, so it would be a shame to operate it in such a sloppy way that you could miss out on some of those benefits. Please take a moment to be sure you are following these guidelines, and make any necessary changes before the end of the year.

Reasons for forming an S Corp generally include:

  • Reducing payroll taxes on a portion of your income
  • Retirement contributions in excess of the limits on IRAs and 401(k) plans
  • Deduction of health insurance costs
  • Limited liability

I will discuss these items briefly below, then move on to some other relevant thoughts.

W-2s and Payroll Taxes

Generally speaking, your S Corp does not pay tax, but rather the income “passes through” to your personal tax return. This pass-through income is taxed at your regular rates, but it is not subject to the federal and state payroll taxes you would pay if you were an employee.

It is important to note that a shareholder of an S Corp is not self-employed, but is actually an employee of the company. As such, you are required to pay yourself a reasonable salary, a term that is not clearly defined, but is intended to prevent shareholders from entirely avoiding Social Security, Medicare and other payroll taxes. One way to look at it is that you should pay yourself what it would cost to hire someone to do your job.

Your salary is treated as a deduction by the company, so you aren’t taxed twice. You pay payroll taxes on your salary, but you don’t pay payroll taxes on the remainder of the S Corp’s income after deducting your salary. That’s one of the benefits of an S Corp.

Action required:  Pay yourself a salary, and issue a W-2 at the end of the year. I suggest you use a payroll service to be sure you are in full compliance with the complex rules and regulations surrounding payroll. Do this before the end of the year.

Retirement Contributions

As an S Corp owner, you have a choice of retirement plans that you can establish. One of the most popular plans is a Simplified Employee Pension, or SEP. An advantage of a SEP plan is that the company can contribute a percentage of your salary, up to a maximum contribution of $54,000. This is substantially higher than the limits for IRAs and 401(k) plans. Do be aware, though, that you also have to offer the plan to your other eligible employees, and contribute the same percentage on their behalf. This is a specialized and complex area, so you should speak with a knowledgeable professional on the subject.

It is important to note again that as an S Corp shareholder, you are not self-employed, but rather an employee of the company. The retirement plan must be created in the name of the company, not yourself, and the contributions are made by the company. Contributions are deductible from the company’s income of course.

Action required: You can establish a SEP retirement plan any time during the year, or up to the date when the company’s tax return is due (even if you file for an extension). Other types of retirement plans may have different rules, so be sure to investigate before the end of the year.

Health Insurance

As an S Corp shareholder, you can deduct health insurance costs for yourself and your family directly on your tax return. But there is a special process for doing so, and it is important that you follow it. The company must pay for your health insurance. It is acceptable to have the insurance in your own name and make the payments yourself, but you need to have the company reimburse you, and deduct the expense.

Health insurance paid by the company is considered compensation to you, and must be added to your salary on your W-2 at the end of the year. You will not pay payroll tax on this amount, but it must be included in gross earnings. You then deduct the amount directly on your personal tax return.

It seems a bit convoluted, but those are the rules.

Action required:  Be sure to have the company reimburse you for medical insurance payments before the end of the year, and be sure to instruct your payroll service to include it on your W-2. If the payroll service gives you trouble, ask to speak to a supervisor… they do this for thousands of people every year.

Limited Liability

To ensure that your S Corp offers limited liability you need to be disciplined in the way you operate it. Without going into depth, you need to establish that it is a separate entity, and not just an extension of your own personal finances. That includes keeping a separate bank account and credit cards, maintaining careful accounting records and keeping up to date with your state’s filing requirements.

Action required: Check that you are following the appropriate discipline to ensure your company is a separate entity.

Estimated Tax Payments

We are required to make payments during the year of the amount of tax we estimate owing for the whole year. This is easy for the salary you pay yourself, because you are expected to withhold and pay federal and state tax from each paycheck.

The issue here is the tax you expect to pay on the company’s earnings that pass through to your personal return. Depending on your situation, these amounts can be substantial, and to add insult to injury, there are penalties for underpayment of estimated tax.

Action required:  Speak with your tax professional at least once during the year, to be sure you are making appropriate estimated tax payments.

State and Local Tax Registration

Many cities have tax filing requirements, and it can be annoying and expensive if you haven’t met their requirements. Los Angeles, for example, assesses tax on income above a specified level, but also has a requirement to register for a business license and renew it every year.

If you are operating outside the state in which you registered the company, you need to check on filing requirements. California, for example, is very aggressive about finding and taxing out-of-state businesses that do business there.

Action required: Learn the filing requirements, and follow them. They will find you if you don’t.

Auto Expense and Home Office

The S Corp can own a car, and deduct any allowable business expenses, but you may find it easier to keep the car in your own name, and submit for reimbursement any business mileage, documenting the locations, distances and business purpose of each trip. You would complete form 2106 on your personal return, and deduct the reimbursement. I often find it convenient and preferable to use the IRS standard mileage rate where eligible – it’s 53.5 cents per mile in 2017.

Similarly, assuming you meet the rigorous and very specific requirements, you can deduct an expense for the business use of your home office. Again, submit expense reports for reimbursement, detailing the square footage of your office space and the total size of your home, in addition to specific allocated costs such as rent, mortgage, utilities, etc.

Action required: Submit detailed expense reports, and have the company reimburse you. Do this before the end of the year.

An S Corporation can be a very useful business format, but there are rules that need to be followed to ensure you get all the appropriate benefits. And remember that an S Corp is not necessarily the best entity for you, depending on your situation and your objectives.

As always, speak to a tax professional before acting… and after!

Last Minute Tax Planning for 2016

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My clients often ask me if I can help them reduce their tax bill. The answer is yes… but for most tax saving opportunities, you have to take action before the end of the year.

Here are some things you can do before December 31 that may have a big impact on your tax bill when April 15th comes around.

Itemized Deductions vs Standard Deduction

There is a long list of expenses that are deductible for tax purposes. They include medical expenses, charitable donations, mortgage interest, state and local income taxes, employment expenses, etc. Some of these expenses are subject to limitations, of course.

Most taxpayers are entitled to the Standard Deduction, though, so unless your deductible items add up to more than the Standard Deduction there is no need to keep track of them. A single person, for example, gets an automatic deduction of $6,300, and a married couple filing jointly gets $12,600.

Sometimes, you may find yourself with deductions that are close to exceeding the Standard Deduction, and accelerating payment of some of the deductible expenses could result in claiming additional itemized deductions. This strategy could result in making it difficult or impossible to itemize next year, but you will come out ahead if you can itemize every second year.

Keep this strategy in mind when you read the rest of my comments.

Defer Income / Accelerate Deductions

There are opportunities to defer income items that would be taxable this year, and move them into next year. You may also be able to pay certain deductible expenses this year that you might have waited to pay next year. This strategy only makes sense, of course, if you are not expecting to be in a higher tax bracket next year.

If you have business income – self-employed, partnership, etc. – you can delay billing your customers or clients, so you don’t receive payment until after December 31. Similarly, you can speed up payment of some of your expenses to get a deduction this year.

If you have a rental property, and your income is under $100,000, you may be eligible to deduct up to $25,000 of rental losses against your regular income. The deduction phases out completely when your income goes over $150,000. It is a good incentive to defer income or accelerate expenses if you are in this range.

Talk to your employer about receiving any year-end bonus after December 31, so you don’t pay tax on it until next year.

Pay your January 15 estimated state tax payment before December 31. Make your mortgage payment at the end of December, instead of January 1. If your medical bills for the year are likely to be more than 10% of your income (7.5% if you’re over 65) then pay as many outstanding medical and dental bills as you can before year-end. Same thing for alimony payments and other deductible items due in January.

Property taxes are typically paid twice a year. In Los Angeles, they are due on November 1st and February 1st. Consider paying both installments this year.

An important note… For many taxpayers, particularly those with higher incomes, there is a limit to the benefit you can get from certain deductible expenses. There are phase-outs as your income rises, but another very important consideration is the Alternative Minimum Tax (AMT). The expenses most likely to be affected are state and local income taxes (especially in California and other high-tax states) and office and employment expenses. If you are subject to the AMT, accelerating payment of these expenses will not do you any good. You should speak with your tax advisor about other possible strategies.

Take Losses Before Year-End

If you have losses on taxable investments, think about selling them this year. They will offset any capital gains you may have, but even if your losses are more than your gains, you can use up to $3,000 to reduce other income, and you can carry any excess losses forward to future years.

Retirement Plans

Make the maximum contributions to your retirement plans.

You can deduct contributions of $18,000 (more if you’re over 50) to your 401(k) plan – but at least make sure you contribute enough to get the full amount of your employer’s matching program.

You may be able to deduct up to $5,500 (more if you’re over 50) to a traditional IRA. If you don’t make a contribution before the end of the year, you have until April 15th. Contributions to a ROTH IRA are not deductible, but penalties are much less severe if you have to withdraw funds early.

If you’re self-employed, you can contribute to a SEP IRA or a similar plan. You can deduct approximately 20% of your self-employment income, up to $53,000. The good news is that you can make your contribution all the way up to the filing deadline, including extensions, which gives you plenty of time to calculate your income. If you have an S Corp, you can also take advantage of a SEP IRA.

Don’t take money out of your traditional IRA or 401(k) plan if you are under 59 ½ years old. There is a 10% penalty on top of the regular tax, and some states have an additional penalty. Before you take an early withdrawal, though, remember that you may be able to borrow from your 401(k). There are also penalties for early withdrawal from a ROTH, but your original contributions are not taxed a second time.

You can take a distribution from your IRA without a penalty if you are a first-time home buyer, if you make qualified tuition payments, and several other special situations. Remember that if you have a 401(k), and plan to make tuition payments, roll the 401(k) over into a traditional IRA first.

Consider rolling over your traditional IRA into a ROTH IRA. You will pay tax on the full amount when you roll it over, but if you expect to be in a low tax bracket this year, for any reason, this might be a good time to do it. Also, there is no required minimum distribution from a ROTH IRA after age 70 ½.

Start taking minimum required distributions from your traditional IRA if you turn 70 ½. There is a 50% tax if you don’t.

Charitable Donations

Charitable donations are a nice deduction, assuming your total deductions exceed the Standard Deduction.

If you have shares of stock that have appreciated in value, consider donating the stock to charity. If you have owned the stock for more than one year, you can deduct the entire appreciated value of the stock, and avoid capital gains tax or Net Investment Income Tax (NIIT).

Gifts

You can make tax-free gifts of up to $14,000 ($28,000 for a married couple) per recipient. (Remember that gifts are not taxed to the recipient, but to the giver). Gifts in excess of this amount require filing a gift tax return, but you won’t actually pay tax until you go over your lifetime limit of $5,450,000.

Qualified payments for tuition or medical expenses are not considered a gift, as long as they are paid directly to the educational institution or the medical provider.

Avoid the “Kiddie Tax”

If your dependent children (under 19, or under 24 if they are full time students) have investment income over $2,100, it will be included in your income, and taxed at your full rate, including NIIT. So think carefully before you give them stocks to sell to pay for college.

Depreciation Opportunities

You can deduct 100% of qualifying asset purchases up to $500,000 (with phase-outs if your total purchases exceed $2 million) under Section 179. This is a tremendous incentive to buy capital assets which you would otherwise have to expense over several years. There are exclusions, but many of the excluded items are eligible for a 50% special depreciation allowance in the year of purchase.

These are terrific deductions. If you are planning to buy assets, buy them before year-end, and reduce your taxes for 2016.

Filing Deadline Changes

A number of changes have been made to filing deadlines this year, including:

Form 1065 Partnership (including LLC) Returns are now due on March 15. Previously, the deadline was April 15, which was inconvenient for the partners, who had to wait for their K-1s in order to meet their own April 15 deadlines. This change is logical, but you need to be aware of it. The extension filing date for partnerships has also changed – from October 15 to September 15. Single member LLCs do not file Form 1065, so there is no change.

Form 1099-Misc and Form W-2 must now be issued to employees and contractors, as well as to the IRS or Social Security Administration, by January 31. It’s a good idea to confirm all employee information and W-9 information before the end of the year.

Subchapter S Corporations and LLCs

If you have a Subchapter S Corporation, don’t forget that you are required to pay yourself a reasonable salary. A major benefit of having an S Corp is that not all of your profits need to be subject to employment taxes, but you do need to pay yourself a salary, and issue yourself a W-2 as an employee. Issuing yourself a 1099 is not a substitute. Setting up W-2 payments after year-end is annoying, and there are stiff penalties for late payment of employment taxes, so take care of it before the end of the year. Also, remember that your health insurance premiums should be added to your W-2 wages (exempt from payroll taxes) and deducted on your personal return.

Do you have an LLC or an S Corporation? Are you getting any real benefit from it? If you are in a state that has a minimum LLC or S Corp tax, you may be paying for something you don’t really need. California’s minimum tax is $800, and you’re also paying for a relatively expensive tax return. If limited liability is a big concern, consider buying insurance that offers appropriate protection. Closing the LLC or S Corp before year-end won’t reduce your 2016 tax bill, but it will cut future costs.

I would be pleased to discuss your tax planning issues.

Buying a House … Residence vs Rental Property

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A common question my clients ask is “Should I buy a house?” A logical extension of the question is “Should I live in the house, or would I be better off renting it out?”

Actually, the question is more often phrased “What are the tax benefits of buying a house?” This can result in a barrage of technical information that doesn’t answer the real question.

THE TAX STUFF

Let’s get the technical tax stuff out of the way:

–  The interest portion of your mortgage payment and your property taxes are tax deductible
–  If you rent out the property, you can also deduct operating expenses like repairs, utilities and management fees
–  If you rent out the property, you can also deduct depreciation. The house itself is depreciated over 27.5 years. Improvements, furnishings and appliances are depreciated at faster rates
–  If you live in the house for more than 2 years, you don’t have to pay tax on the first $250,000 of capital appreciation – the exemption is $500,000 if you’re married and file a joint return
–  If you make under $100,000 you can deduct rental losses on your tax return. But if you make between $100,000 and $150,000, the deduction phases out to zero. The good news is you can deduct the disallowed losses when you sell the house
–  If you rent the property, your gain on sale is taxed at capital gains rates, which are lower than regular rates. Depreciation you deducted is recaptured at regular rates
–  If you pay Alternative Minimum Tax, all bets are off…but if you live in the house, your mortgage interest is a deduction for AMT purposes

There’s the barrage of information. Do you know what you want to do now? I don’t think so.

WHAT YOU”RE TRYING TO ACCOMPLISH

Living in your house accomplishes three main objectives:

– You stop paying rent to somebody else
– Tax deductions for mortgage interest and property taxes make your monthly payments more affordable
– With a relatively small down payment, you get the benefit of the full amount of any gain on sale. It’s not unusual to make a gain as big as your down payment. That’s a 100% return on your investment – and $250,000 or $500,000 of the gain is tax-free

When you rent out your house, the objective is to bring in enough rental income to cover your cash payments for mortgage, property tax and operating expenses. Depreciation doesn’t affect your cash flow, but it can be used to create losses for tax purposes if you are in an income range to benefit from the deduction. I’m sure there are places where you can generate positive cash flow from a rental home, while paying no tax because of the depreciation deduction. A few years ago I worked with a Midwest homebuilder where we marketed houses for exactly that business model, but I now live in Southern California, and positive cash flow is only a dream.

Your income mostly comes from the gain you make when you sell the house. This gain is taxable, but it’s taxed at a lower rate than your regular income.

The downside of renting out your house is that you still have to live somewhere. Any profit you make will be reduced by the rent you pay. If you already own your home, of course, that’s not an issue.

RESIDENCE OR RENTAL – WHICH IS BETTER?

Here’s an example that compares the results of living in your home and renting it out.

I made a number of assumptions as the starting point. I’m sure you can poke holes in some of them, but bear with me.

– You are currently paying rent of $2,500 a month
– You have $150,000 for a down payment
– You buy a house for $600,000 and sell it 5 years later for $700,000
– You take a $450,000 mortgage at 4.0% interest, and pay 2.0% a year for property taxes
– You can rent the house to tenants for $3,600 a month
– Operating costs are $3,600 a year for your residence, and $5,000 for the rental
– Your selling costs are 6% when you sell the house
– Your regular tax rate is 30%

Option 1 – Don’t Buy the House

If you don’t buy the house, you continue to pay $2,500 a month in rent. After 5 years, you have spent $150,000. End of story.

Option 2 – Live in the House

Your mortgage payment is $2,170 a month, and your taxes are another $1,000. You’re now paying for repairs and maintenance, but the tax benefit of the interest and tax deduction means you’re only paying about $200 a month more than when you were renting.

You make $100,000 in profit when you sell the house (less $42,000 in closing costs) but you don’t pay tax on the gain. You also get your down payment back, plus you paid off $43,000 on your mortgage.

Over all, your total cost after 5 years is $63,000. This compares with $150,000 you would have spent on rent. Congratulations – by buying the house you saved $87,000.

Option 3 – Rent the House

You rent the house out for $3,600 a month, which is pretty much exactly the amount you pay out for mortgage payments, property taxes and operating costs. You get a tax deduction of $16,000 a year for depreciation, but if you make more than $150,000 it just adds to your deferred loss.

You make the same $100,000 profit when you sell the house. This is taxable at capital gains rates, but the $42,000 closing costs are deductible. As above, you get back your down payment and the $43,000 you paid down on your mortgage.

Your after-tax income from the rental property is $82,000. Nice, really nice. You’ve made a pretax return on investment of 11% a year. Compare that with the return on other investments.

BUT… not so fast.

You still have to live somewhere while you’re renting out the house. Right? Assuming you continue to pay $2,500 a month in rent, that turns your rental profit into a net cash cost of $68,000. The good news is that you’re still miles ahead of where you would have been if you hadn’t bought the house at all, and only about $5,000 behind using the house as your residence.

Do you think you could increase the rent on the house over 5 years? That would make the results of renting vs living in the house about the same, wouldn’t it?

CONCLUSION

Sorry, I’m not giving you a conclusion. This was just one example, and your situation is almost certainly going to be different. My assumptions are just assumptions, and you would have to do a careful analysis of the facts before you move forward.

There are a lot of subjective issues as well. Do you want the headache of being a landlord? And what about unforeseen problems like bad or unreliable tenants? But what about the upside gain if rents keep climbing the way they are in Los Angeles these days?

I would be happy to discuss your specific situation, and run my model with assumptions that apply to you.

Reduce Your 2015 Tax Bill

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My clients often ask me if I can help them reduce their tax bill. The answer is yes… but for most tax saving opportunities, you have to take action before the end of the year.

Here are some things you can do before December 31 that may have a big impact on your tax bill when April 15th comes around.

Itemized Deductions vs Standard Deduction

There is a long list of expenses that are deductible for tax purposes. They include medical expenses, charitable donations, mortgage interest, state and local income taxes, employment expenses, etc. Some of these expenses are subject to limitations, of course.

Most taxpayers are entitled to the Standard Deduction, though, so unless your deductible items add up to more than the Standard Deduction there is no need to keep track of them. A single person, for example, gets an automatic deduction of $6,300, and a married couple filing jointly gets $12,600.

Sometimes, you may find yourself with deductions that are close to exceeding the Standard Deduction, and accelerating payment of some of the deductible expenses could result in claiming additional itemized deductions. This strategy could result in making it difficult or impossible to itemize next year, but you will come out ahead if you can itemize every second year.

Keep this strategy in mind when you read the rest of my comments.

Defer Income / Accelerate Deductions

There are opportunities to defer income items that would be taxable this year, and move them into next year. You may also be able to pay certain deductible expenses this year that you might have waited to pay next year. This strategy only makes sense, of course, if you are not expecting to be in a higher tax bracket next year.

If you are self-employed, you can delay billing your customers or clients, so you don’t receive payment until after December 31. Similarly, you can speed up payment of some of your expenses, to get a deduction this year.

Talk to your employer about receiving any year-end bonus after December 31, so you don’t pay tax on it until next year.

Pay your January 15 state tax estimated payment before December 31. Make your mortgage payment at the end of December, instead of January 1. If your medical bills for the year are likely to be more than 10% of your income (7.5% if you’re over 65) then pay as many outstanding medical and dental bills as you can before year-end. Same thing for alimony payments and other deductible items due in January.

Property taxes are typically paid twice a year. In Los Angeles, they are due on November 1st and February 1st. Consider paying both installments this year.

An important note… For many taxpayers, particularly those with higher incomes, there is a limit to the benefit you can get from certain deductible expenses, and the Alternative Minimum Tax (AMT) comes into play. The expenses most likely to be affected are state and local income taxes (especially in California and other high-tax states) and office and employment expenses. If you are subject to the AMT, accelerating payment of these expenses will not do you any good. You should speak with your tax advisor about other possible strategies.

Take Losses Before Year-End

If you have losses on taxable investments, think about selling them this year. They will offset any capital gains you may have, but even if your losses are more than your gains, you can use up to $3,000 to reduce other income, and you can carry any excess losses forward to future years.

Retirement Plans

Make the maximum contributions to your retirement plans.

You can deduct $18,000 (more if you’re over 50) to your 401(k) plan – but make sure you contribute enough to get the full amount of your employer’s matching program.

You may be able to deduct up to $5,500 (more if you’re over 50) to a traditional IRA. If you don’t make a contribution before the end of the year, you have until April 15th.

If you’re self-employed, you can contribute to a SEP IRA or a similar plan. You can deduct approximately 20% of your self-employment income, up to $53,000. The good news is that you can make your contribution all the way up to the filing deadline, including extensions, which gives you time to calculate your income.

Don’t take money out of your IRA or 401(k) plan if you are under 59 ½ years old. There is a 10% penalty on top of the regular tax, and some states have an additional penalty.

You can take a distribution from your IRA without a penalty if you are a first-time home buyer, if you make qualified tuition payments, and several other special situations. Remember that if you have a 401(k), and plan to make tuition payments, roll the 401(k) over into a traditional IRA first.

Consider rolling over your traditional IRA into a ROTH IRA. You will pay tax on the full amount when you roll it over, but if you expect to be in a low tax bracket this year, for any reason, this might be a good time to do it. Also, there is no required minimum distribution from a ROTH IRA after age 70 ½.

Start taking minimum required distributions from your traditional IRA if you turn 70 ½. There is a 50% tax if you don’t.

Charitable Donations

Charitable donations are a nice deduction, assuming you do not claim the Standard Deduction.

If you have shares of stock that have appreciated in value, consider donating the stock to charity. If you have owned the stock for more than one year, you can deduct the entire appreciated value of the stock, and avoid capital gains tax or NIIT.

Gifts

You can make tax-free gifts of up to $14,000 ($28,000 for a married couple) per recipient. (Remember that gifts are not taxed to the recipient, but to the giver)

Qualified payments for tuition or medical expenses are not considered a gift, as long as they are paid directly to the educational institution or the medical provider.

Avoid the “Kiddie Tax”

If your dependent children (under 19, or under 24 if they are full time students) have investment income over $2,100, it will be included in your income, and taxed at your full rate, including NIIT. So think before you give them stocks to sell to pay for college.

Depreciation Opportunities

As the law stands right now, you may deduct up to $25,000 of qualifying assets purchased in 2015, under Section 179. This amount was $500,000 in 2014, and may be increased by Congress for 2015 before the end of the year. In 2014 there was also a bonus depreciation provision that allowed you to expense 50% of qualified asset purchases. This may or may not also be reinstated for 2015. Think about these provisions when purchasing equipment for your business.

Subchapter S Corporations and LLCs

If you have a Subchapter S Corporation, don’t forget that you are required to pay yourself a reasonable salary. A major benefit of having an S Corp is that not all of your profits need to be subject to employment taxes, but you do need to pay yourself a salary, and issue yourself a W-2 as an employee. Issuing yourself a 1099 is not a substitute. Setting up W-2 payments after year-end is annoying, and there are stiff penalties for late payment of employment taxes, so take care of it before the end of the year.

Do you have an LLC? Are you getting any real benefit from it? If you are in a state that has a minimum LLC tax, you may be paying for something you don’t really need. California’s minimum tax is $800. You’re also paying for a relatively expensive tax return. If limited liability is a big concern, consider buying insurance that offers appropriate protection. Closing the LLC before year-end won’t reduce your 2015 tax bill, but it will cut future costs.

I would be pleased to discuss your tax planning issues.