In this video, I discuss year-end tax planning strategies as covered on the Tax Compliance and Planning (TCP) on the CPA exam.
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The primary objective for taxpayers is to lower their tax burden, a process known as tax planning. This involves two key strategies:

Reducing Taxable Income: This can be achieved in two ways:

Reducing Income: This doesn't necessarily mean earning less. Instead, it involves making smart financial choices that are taxed at a lower rate. For instance, investing in retirement accounts like 401(k)s or IRAs can reduce your current taxable income, as contributions to these accounts are often tax-deductible.
Increasing Allowable Deductions: Tax deductions reduce your taxable income. These can include various expenses like mortgage interest, charitable donations, certain medical expenses, and business-related expenditures. Maximizing these deductions effectively lowers the amount of income that is subject to tax.
Increasing Tax Credits: Unlike deductions, which lower taxable income, tax credits directly reduce the amount of tax you owe. Some credits can even result in a refund if they exceed your total tax liability. Examples of tax credits include education credits, the Earned Income Tax Credit (EITC), and credits for energy-efficient home improvements.

Common Tax Strategies:

Control When Income is Taxed (Tax-Deferred Options): Income can be deferred through vehicles like retirement accounts (401(k), IRA). For example, contributing to a traditional IRA allows you to defer taxes on the contributed amount until withdrawal in retirement, potentially at a lower tax rate.

Tax-Deferred Like-Kind Exchanges or Installment Sales: In a like-kind exchange, you can defer capital gains tax by exchanging a business or investment asset for a similar one. For instance, exchanging one rental property for another. The installment sale method allows you to spread out capital gains over several years, reducing the tax burden in any single year.

Taxing Income at a Lower Rate: Income from qualified dividends or long-term capital gains is taxed at a lower rate than ordinary income. If you hold a stock for more than a year before selling, any profit is considered a long-term capital gain, taxed at a more favorable rate than short-term gains.

Accelerating Deductions: Accelerating deductions into the current tax year can lower taxable income. For example, if you anticipate a higher income this year, you might pay deductible expenses like property tax or charitable contributions in advance.

Exceeding the Standard Deduction with Itemized Deductions: Itemizing deductions can be beneficial if the total exceeds the standard deduction. For example, bunching charitable donations or prepaying deductible expenses like mortgage interest to surpass the standard deduction threshold.

Maximizing Employer-Sponsored Plans: Contributing maximally to employer-sponsored retirement plans (like 401(k)s) and health care plans (like HSAs) reduces taxable income. For instance, contributing the maximum to a 401(k) reduces your taxable income by that amount.

Filing as Head of Household: Qualifying for head of household status, if possible, can provide a higher standard deduction and lower tax rates than filing single. For example, a single parent with a dependent child might qualify for this status.

Utilizing Tax Credits: Ensure all applicable tax credits, such as child tax credits or education credits, are fully utilized. These credits directly reduce your tax liability, dollar for dollar.

Withholding and Estimated Tax Payments: Ensure enough taxes are withheld from your paycheck or make estimated tax payments to avoid underpayment penalties. For example, if freelance income has increased, adjusting quarterly estimated tax payments can help avoid penalties.

Foreign Earned Income Exclusion or Tax Credit: For those working abroad, the foreign earned income exclusion allows exclusion of a certain amount of foreign income from U.S. taxes. Alternatively, the foreign tax credit can offset taxes paid to another country. The best option depends on individual circumstances and tax rates in the foreign country.

Avoiding Imputed Interest: Imputed interest on below-market loans between family members or friends must be reported as income. Structuring the loan with interest rates at or above the IRS's applicable federal rate can avoid this.

Holding Period for Qualified Stock Options: For stock options, meeting the required holding period (usually 1 year) after exercise can lead to favorable long-term capital gains tax treatment on any profit.

Each of these strategies requires careful consideration of individual circumstances and often benefits from consultation with a tax professional. The practical illustrations provided are general examples and may vary based on specific tax laws and individual situations.







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