It's hard to believe that the year is ¾ over, but as we enter the final quarter, managing tax liabilities and planning for the year ahead should be on everyone's mind. Forgetting year-end tax planning is easy to do, but might be an expensive mistake, because taking a few simple steps at the end of the calendar year can greatly help manage taxes due. In the following paragraphs I...'ll step through a few of these options in hopes that you can use them in your year-end tax planning.
Prepaying bills is a good tool to reduce tax liability. Whether you are a homeowner or farmland owner, prepaying mortgage payments is a good tool to increase the amount of interest available for deduction. For a farm, accrued interest on an annual land payment due in early 2014 can be considerable. Prepaying for farm supplies like seed, fertilizer, chemicals and farm equipment is another good tool to look at. Specific quantity and price terms should be in writing to ensure the deductibility of these prepayments and equipment must be in your possession at the end of the tax year. Special care should be taken here as farmers are unsecured creditors to the businesses they've made prepayments to, making it difficult to retrieve money paid if the business isn't financially stable and can't deliver the product.
Giving to qualified charities is something to consider as well in managing year end taxes if you itemize your deductions. To ensure that you are eligible to deduct these contributions, make sure to get a receipt and consider using a credit card. Checks written near the end of the year might not clear before the clock strikes midnight on New Year's Eve. For non-cash donations, good records should be kept on donated items in good condition as well as an estimate of "fair market value" to use for your tax deduction. Also, consider donating stocks that have appreciated considerably instead of cash; you'll get credit for the value of the stock at the time of the donation and won't be liable for the associated capital gains taxes.
Deferring income is a strategy that is useful to help balance income between years. In crop and livestock production, it is possible to forward contract or defer payments into the New Year. Using this strategy to balance income between years will help to ensure that as much income as possible is taxed at the lower tax brackets. Again, with deferred payment arrangements, be careful to consider the party you are entering into the agreement with as you will be an unsecured creditor to that business.
Reviewing stock investments at the end of the tax year is another good tool to look at in year-end tax planning. If some stocks have been sold at a substantial gain, looking for holdings that are being held at a loss may be a good tax management opportunity as well as a good chance to put the money to work in a more profitable investment. Often, we hold onto losing stocks hoping for them to turn around when cutting our losses and moving onto better options may be the best move.
Consider contributing to a retirement account for yourself or college savings plan for children or grandchildren. IRA contribution limits are $5,000 for those under 50 and $6,000 for those above. For a traditional IRA, these contributions are tax deductible and for Roth IRA's, the distributions are tax free down the road.