Tax planning involves timing of factors such as receipt of income or a change in filing status. Consider ways to get the greatest savings for this year and later.
An often-overlooked strategy is that the advancement or postponement of the date of a marriage or divorce by a single day at year-end can make a sizable difference in the amount of your tax tab for both years.
Your marital status as of Dec. 31 usually determines your filing status for the entire year. Therefore, the Internal Revenue Service ordains that you are a married person for all of 1990 even if you wait until Dec. 31 to wed. Similarly, the feds consider you to be single for all of 1990, though your divorce or legal separation takes place as late as the last day of the year.
Suppose, for example, that you and your prospective mate both earn roughly the same. In that event, matrimony before the end of 1990 may be costly. Reason: The taxes that the two of you become obligated to pay as marrieds on your combined incomes can turn out to be a good deal more than they would be as two unmarrieds who share lodgings and report exactly the same incomes -- a law quirk that is known as the "marriage penalty." But if you delay the ceremony until next year, you get a reprieve from the marriage penalty for this year.
Conversely, a marriage this year is a smart move when one of you earns the bulk of the income or considerably more than the other. Your taxes as a couple filing jointly will be less than if you remain unmarried.
Similar rules apply to couples who cut their ties. A divorce near the end of the year means that you forfeit the benefits of joint filing for all of 1990. To save taxes, you have to grin and bear it beyond Dec. 31. What if being single provides an advantage? You can achieve that goal only if you shed your spouse by Dec. 31.
SHIFTING INCOME: Do you run a business, either full time or as a sideline to a salaried job? Unlike the typical employee, you have a good deal of flexibility on the year in which to report income from free-lance extra jobs or professional services.
Here are some year-end moves that might help if you expect a significant drop in your top rate for federal and state taxes next year, perhaps because you and your spouse no longer moonlight at a second job, go on maternity leave, decide to take early retirement, or move out of a state with a high tax rate into one with a low rate or without any tax at all, as in the case of a California-to-Texas transfer.
To push the receipt of income past New Year's Eve (assuming you report on a cash, not an accrual, basis), simply delay the mailing of bills to clients until after Dec. 31, or bill them so late in December that payment this year is unlikely. Don't press clients for payment in this year of money owed to you. Also, pay business expenses this year, rather than deferring payment until next year. Similarly, you can wait until next year to realize profits from the sale of stocks or other investments.
Do the opposite if you anticipate a significant increase in your top tax rate next year. Maybe you are switching to another line of work that pays a good deal more, your spouse is returning to work after a jobless period, or you are moving out of a state with a low or no tax rate into a state with a high rate, as in the case of a Texas-to-California move. Accelerate income from the next year into this year, while you remain in a lower bracket.
Most employees can do little to control when they report their salaries.
You are not able to defer income to next year simply by, say, stashing paychecks in a drawer, rather than cashing or depositing them, or arranging with your employer to hold them back until after Dec. 31.
NEXT: Timing the redemption of U.S. Savings bonds and Treasury bills.