28.2 When To Defer Income and Accelerate Deductions

Your tax bracket may shift from year to year because of fluctuations in income or expenses. If you expect to pay less tax in the following year than in the current year, consider deferring income and accelerating deductible expenses and losses. Even if you expect your tax bracket to remain the same, you may want to accelerate deductions to reduce tax for the current year or defer income, if possible, to delay the payment of tax.

Election year complication. Although typical year-end strategies involve trying to defer income and accelerate deductions, high-income taxpayers who fear the possibility of higher tax rates in 2013 (if the Obama Administration returns to office) may be wary of deferring income beyond 2012, and if they have substantial paper long-term capital gains, they may prefer to realize the gains before the end of 2012.

Postponing income.

You may not defer salary income by not cashing a paycheck or not taking salary that you have earned and that you can receive without restrictions. Under certain conditions, you may contract with your employer to defer the taxable receipt of current compensation to future years. To defer pay to a future period you must take some risk. You cannot have any control over your deferred pay account. If you are not confident of your employer’s ability to pay in the future, you should not defer pay.

Planning Reminder

Deferring Business Income

If you are self-employed and are on the cash basis, you can defer income by delaying your billing at the end of the year or extending the time of collection. If you own a closely held corporation, you can time the payment of dividends and bonuses.

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Accelerating deductions.

In accelerating deductions, there are these limitations: You may not deduct prepaid interest and rent. Prepaid interest must be deducted over the period of the loan. Rentals must also be deducted over the rental period. You can generally deduct prepayments of state income tax, but prepayment should not be made if it would trigger AMT liability (23.2). Annual subscriptions to professional journals and business magazines can be renewed before the end of the year. If the subscription is for more than a year, you may deduct only the first-year prepayment. The cost of the later subscription must be deducted in the later year. Business and investment expenses charged to credit card accounts are deductible in the year of charge, even though you do not pay your charge account bill until the next year. You can also realize losses by selling business or investment property that has lost value in the year you want to incur the loss.

Making an extra charitable donation at the end of the year also may provide an added deduction that may lower your tax. You may deduct a charitable gift made by check on the last day of the year, even if the check is not cashed until the new year begins. A credit card donation is deductible in the year of the charge. Charitable donations may be timed to give you the largest possible tax savings. If, toward the end of the year, you find that you need an extra deduction, you may make a deductible donation in late December. Doing so would be especially beneficial if you know that your tax bracket will be lower the following year; see Chapter 14 for further planning details.

Also see Chapter 13 for claiming the standard deduction and itemizing deductions in alternate years, and Chapter 23 for planning steps when you may be subject to alternative minimum tax.

Deferring interest income.

As a general rule, you have to report interest credited to your savings account during the year, even if the account is a passbook account and you did not present the passbook to have the amount entered. However, there are opportunities to defer interest in the following ways:

Timing sales of property.

A sale is generally taxable in the year title to the property passes to the buyer. Since you can control the year title passes, you can usually defer income realized on the sale to the year in which you will pay less tax. See the discussion of year-end sales of securities in 30.1.