If you are a W2 wage earner, your income doesn’t fluctuate with the ups and downs of your employer’s profitability. As long as the business stays afloat, you get paid. Those of us who own businesses, on the other hand, have good years and bad years. We must shift income between years for tax savings, balancing highs and lows so we can cover expenses when revenues drop.
Whether you are investing in a business, in real estate, or in other assets, you are agreeing to live by the risk-return trade-off. If you take a risk, you create the possibility of higher financial return. Of course, you may also lose your investment altogether.
As the year comes to a close, now is a good time to review your anticipated annual net income. If it’s a good year, consider moving expenses from the coming year into the current year (this is both legal and appropriate). If it’s a bad year, consider ways to capitalize on the tax advantages that come with operating at a loss.
Before I go further, I must say in the strongest possible terms that I am writing to provide questions for you to review with your accountant and/or financial planner. I am not giving advice here, simply offering ideas for your consideration.
How to offset taxable income
If you’ve had a good year, you’ll want to take on additional expenses to offset your taxable income. Here are some ways to do so.
- Pay both installments of your property taxes before the end of the year.
- Do deferred maintenance on your investment property, such as upgrading your heating and air conditioning system or rewiring. You can pay for these expenses with a credit card, so you get the benefit of 2024 deductions but do not have to pay the bill until next year.
- Pre-pay insurance premiums. You can pay a year’s worth of expenses in December and deduct them in 2024.
- If you rent your workspace, you can pay all of 2025 rent payments in December and deduct them in 2024. If you don’t want to put your landlord in a bind with a bunch of unanticipated income for 2024, send the check on December 31. Your landlord will receive the check in January and be able to report the income in 2025, but you still get to deduct it in 2024.
- If you own your workspace, pre-pay mortgage payments for up to a year in advance, and make sure those payments do not go solely toward principal reduction. (You can also do this for your personal residence.)
- If you are a landlord, you can let your tenants know they can wait until January to make December rent payments without penalty.
- Do improvements, especially to improve the energy efficiency of your property. Consider installing a solar array, retrofitting insulation, replacing inefficient appliances, adding attic fans, weather stripping, and more. There are often tax rebates for these types of upgrades. Even if you cannot take care of all these improvements this year, hang onto the list and plan for next year.
- If you use a vehicle as part of your business and you need a new one, buy it before the end of the year and take advantage of accelerated depreciation. (If you had a bad year, this is not the year to buy a new car because the tax benefits will be wasted.)
- If you are in the process of buying property, be aware that some closing costs are deductible in the year paid, so if you can close escrow before December 31, do so.
How to take advantage of financial losses
If you had a bad year and you have a conventional retirement account, you can deduct funds from the retirement account in 2024 without paying high income taxes on that money (lower income, lower tax bracket). If you already have a Roth IRA, you can move funds from your conventional individual retirement account (IRA) to a Roth IRA and not pay penalties. The funds remain in retirement and accumulate tax free.
Everyone’s financial situation is different, which is why no one should run out and put my ideas into practice without first having a lengthy chat with their tax consultant.
For more information of how to speed up depreciation to take advantage of tax savings with real estate and other investments, check out my prior article on cost segregation at selzerrealty.com/2023/10/02/to-save-on-taxes-timing-matters. It’s probably too late to do much with this for this year, but you can put it on your list for 2025.