I RECEIVE MANY queries about taxes. Most of the questions people send are pretty much the same: They want my advice on how to lose less to the IRS.
Most of the answers I send back are pretty much the same: I advise them to plan ahead and stay on top of tax-law changes, especially whether they will be hurt or helped by the Republicans’ proposals for the most sweeping revisions in more than 30 years.
There’s something I’ve repeatedly learned in the course of four-plus decades of dispensing advice on how to render less unto Caesar: The only time most of us think of doing something about our federal income taxes is once a year—the hours we spend actually grappling with Form 1040 or when gathering records to deliver to paid preparers.
What we should do is make tax planning a year-round concern and position ourselves to take full advantage of the many opportunities that are available to lessen the amount siphoned off each year by the IRS. The savings can amount to many thousands of dollars.
Let’s say you have income from freelancing. The IRS requires most freelancers and other self-employed individuals to use the cash method of accounting, under which income isn’t counted until cash, a check or an e-payment is received, and expenses aren’t counted until they’re paid.
How does the IRS apply that requirement to a hypothetical freelancer I’ll call Phyllis Neff? Like most other freelancers, Phyllis has a good deal of flexibility on whether to report income or deduct expenses in 2017 or 2018. As part of her end-of-year financial planning, she should review perfectly legal tax-trimming tactics that must be taken by Dec. 31 if they aren’t to be lost forever.
Let’s suppose Phyllis anticipates that 2017’s income from freelancing and other sources, together with the resulting tax tab, will be higher than 2018’s. Possible reasons for descending to a lower bracket for 2018: Phyllis is expecting a baby in 2018 and scales back on assignments; she or husband Walter no longer moonlight at a second job or decide to take early retirement; or they move out of a state with a high income-tax rate into one with a low rate or without any tax at all, as in the case of a California-to-Texas transfer. Oh, and let’s not forget that lower rates are the centerpiece of the Republicans’ proposals. Any of those events can put her in a lower tax bracket in 2018.
The traditional advice for Phyllis: Push the receipt of 2017 freelancing income past New Year’s Eve by delaying end-of-year billings until after Dec. 31 or bill clients so late in December that payment this year is unlikely. On existing invoices, don’t press for payment in 2017 of money owed, provided that tactic doesn’t jeopardize collection.
As for business expenses, pay them in 2017, rather than deferring payment until 2018. Similarly, wait until 2018 to realize profits from sales of stocks or other investments, unless losses from other sales will be available to offset gains realized in 2017. The reward for Phyllis’s attention to timing: She’ll keep money in her pocket and out of the IRS’s till—which is, after all, what tax planning is all about.
What if Phyllis anticipates a significant increase in next year’s top tax rate? The traditional advice: Do exactly the opposite. Possible reasons for ascending to a higher bracket in 2018: She switches from freelance to a job that pays a good deal more; Walter returns to work after a jobless period; or they move out of a state with a low or no tax rate to a state with a high rate, as in the case of a Texas-to-California move.
In these scenarios, it pays for Phyllis to accelerate income from 2018 into 2017, while she’s still in a lower bracket. Similarly, she should delay payments of as many deductible business expenses as possible until 2018, when write-offs will give her greater tax savings.
Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous articles include A Year for Generosity and Capital Punishment. This piece is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers and Other Freelancers, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.