Tax strategies for prosperous years

1. In years with net self-employment income below the threshold, make business expenditures before the year’s end to get a tax deduction. One hundred dollars of expenditures saves you $15 in self-employment tax. In years when net self-employment income is above the threshold and you expect to be below the threshold the following year, delay expenditures until the following year to take advantage of the 12% change in the self-employment tax rate. If you spend $100 in a year that you are above the threshold, you will only save $3 in self-employment tax. If you wait until the following year when you are below the threshold, you will save $15 of tax.

   A word of caution for lean years: You still may owe a considerable amount of self-employment tax. For example, even when you have no taxable income for income tax purposes (after deductions, etc.), you might still have $10,000 or more of net self-employment income. You would owe approximately $1,500 ($10,000 x 15%) of self-employment tax with your return. This is not an uncommon situation, so be sure to build it into your budget.

2. Consider bunching itemized deductions into high-income years and taking the standard deduction or reduced itemized deductions during low-income years. This allows you to deduct more when you are in a higher tax bracket and ensures that you take full advantage of the standard deduction when you are in a lower tax bracket. For example, make charitable contributions, mortgage payments, and property-tax payments in December of a high-income year if you would normally pay them early the following year. Beware though: If your income is significantly above $133,000, check with your tax professional before using this strategy. If you owe alternative minimum tax, this strategy is not for you.

3. Consider selling securities for a net loss. You can offset capital gains with capital losses and deduct $3,000 of a net capital loss from ordinary income in any one year. The remainder is carried to future years. If you are in the 30% tax bracket, a $3,000 loss will save you $900 in taxes.

4. Visit with your tax adviser in October or November for year-end tax planning. It can save you big bucks.

– Debbie Webb, MS, CPA, of Thompson, Derrig & Craig in College Station/Bryan

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