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Delay Your Income

Posted by  on Apr 16, 2009
 
Deferring income and thereby reducing tax liability may occur in your near future. This can occur in connection with a year-end bonus, deferred compensation agreement, interest income, alimony payments, installment sales, and flexible-spending accounts. A taxpayer who expects to earn substantial interest income in late 2000 should consider purchasing a short-term certificate of deposit that matures in 2001. None of the interest earned will be subject to tax in 2000 provided interest on the CD is not payable without penalty until next year.

In addition, a taxpayer who is planning to sell in 2000 certain investment property, such as real estate or stock in a closely held business, can defer recognizing gain by structuring the sale on an installment basis. A flexible spending account, which generally must be set up in 2000 to save on next year's taxes, permits a taxpayer to pay for eligible health and dependent care expenses with pretax wages. The amount contributed to the account also is not subject to FICA taxes.

Alimony payments, but not property settlements, are deductible. Alimony payments are income to the person who receives them, but if the recipient is in a lower tax bracket, there will be a net tax benefit that both the person paying the alimony and the recipient can share. Before finalizing a separation or divorce agreement, a tax adviser should be consulted regarding whether payments can be characterized as deductible alimony.

Remember that an employee may be able to obtain a written deferred compensation agreement from his or her employer. Under such a plan, the employee elects to defer a portion of income until a stated time, and is taxed on the deferred income only when it is received. To obtain the tax benefit, the employee must be willing to accept the risk that he or she may not receive the payments. Using an irrevocable trust to hold the deferred compensation can help minimize this risk.

One interesting tidbit is that a taxpayer who is over age 59 1/2 and has a traditional IRA may be able to increase his or her 2000 income without penalty by making withdrawals from the account. In addition, a taxpayer who owns nonqualified stock options should consider, from an investment perspective, whether this might be a good year to exercise those options.

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