Ways to increase or decrease your taxable income

Individuals 05.05.2022 3 MIN

During year-end tax planning you may want to manipulate the timing of income or deductions. Review some common strategies.

Accelerating deductions and deferring income can reduce your tax liability. In some cases, you may want to do the opposite—accelerate income and delay deductions. These methods can help you pay a lower income tax rate in the long run, especially if your tax rate is—or could be—changing in the next year.

If you have access to Ayco, your advisor can help you implement a tax-efficient strategy. You can also work with a tax advisor to review your specific circumstances.

Whether it’s best for you to increase or decrease your taxable income for the year, here are some strategies to consider.

Typical methods of deferring income

If you want to defer income, consider:

Deferring compensation if still available to you, given the deferral election limitations of §409A
Making investments, such as Treasury Bills, that will not generate income until next year
Deferring the exercise of non-qualified stock options
Deferring the recognition of capital gains. One way to lock in price in the current year but defer gain until next year is to sell property on an installment basis with, if possible or appropriate, payment to be made next year. This technique does not work for sales of publicly traded securities, the gain on which will be taxed immediately based on the trade date
Deferring gain into a Qualified Opportunity Zone investment or by engaging in a like-kind exchange
Delaying the timing of the cancellation of debt to the extent possible
Delaying the billing of clients or customers if possible and if doing so will not prevent the taxpayer from having enough business income to maximize retirement plan contributions

Typical methods of accelerating deductions

In addition to deferring income, another way to decrease your tax liability in the current year is to accelerate deductions. Here are some common methods:

Pre-funding multiple years’ worth of charitable contributions by funding a donor advised fund, such as the Ayco Charitable Gift Fund
If possible, settling a casualty loss claim with an insurance company this year so that the loss can be taken in the current year
Business or rental-related property taxes that have already been assessed but are not due until next year can be deducted and paid in the current year

Typical methods of accelerating income

If you want to accelerate income, consider:

Exercising non-qualified stock options
Making an 83(b) election upon receipt of restricted property from an employer
Shifting (to the extent possible) the timing of the discharge of indebtedness income
To the extent possible, billing customers or clients so payments are received prior to year-end

There are additional strategies if you’re looking to accelerate capital gains:

Selling appreciated assets in the current year
Electing out of installment sale treatment
Intentionally avoiding like-kind exchange treatment
Not deferring gains from an investment in a Qualified Opportunity Fund
Choosing to not reinvest proceeds from the sale of qualified small business stock in new qualified small business stock

Typical methods of deferring deductions

If you expect your deductions to produce a larger tax savings next year, here are some common methods of deferring them:

Paying deductible taxes that have already been assessed but are not due until the next tax year
Disposing of a passive activity that has accumulated suspended passive losses can be delayed until the next tax year, allowing the freed-up suspended losses to offset income in that year
Delaying the purchase of business-use assets if the asset will be subject to bonus depreciation or §179 expensing
If you own an interest in a partnership or S corporation where losses are suspended due to insufficient basis, you can delay creating additional basis until the next tax year
Deferring the sale of an asset in a loss position until the next tax year

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