The title of this article should really be “Proactive Tax Planning.” Backwards tax planning is what you want to avoid by taking steps to minimize your taxes throughout the year. Steps you should be taking throughout the year include:
Businesses:
Entity Selection: The entity that you use to operate your business has a very large impact on your tax situation. Although there are ways you can make changes to the way your business is taxed retroactively, there are additional hurdles you will have to jump through, and there is no guarantee that your elections will be accepted. Generally, these elections have to be made within the first 75 days of the year.
Large Purchases: This includes purchasing vehicles and equipment, which must be placed into service before the year is over. If you were looking for a large deduction for 2014 and have not done so, then it is too late.
Timing of Receipts: If you are on the cash-basis, which means that you record sales when your customers pay you, then you can delay sending out December’s invoices so that you can get paid in January.
Individuals:
Investment Planning: The nature of your investments can have a large impact on the amount of taxes you pay, especially if your investments generate a lot of income. Your investments should be allocated to be tax-efficient.
Benefit Elections: Some elections can be made at any time during the year, but others, such as FSA (flexible spending accounts) and dependent care accounts usually need to be made at the end of each year.
Charitable Contributions: Properly planned charitable contributions, including donations of appreciated stock or valuable household items can produce an excellent tax benefit.
There are numerous tax strategies that can be employed, but you must be proactive to be able to take advantage of them.