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Strategize for Next Year – No Time Like the Present

Geoffrey Kayton, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

10.24.22 | TAX Chat

As a tax advisor, I am regularly in a position where I wish I knew about certain events earlier. With time, I can generally deal with issues to maximize the potential tax benefit. Without time, I am regularly stuck with one or more bad options. In the spirit of filing season, I am going to discuss strategies to prepare for next year and to ensure the lowest possible tax liability. To do so, I will outline a number of things to consider and provide a little detail on each.

Discuss projections, and exceptional balances and transactions, with your advisor before year-end

When a tax advisor is involved in your transactions and generally understands how your business is performing, that person has the opportunity to advise as issues emerge. The structure and documents governing a transaction can completely change the associated tax liability. Since tax is determined on an annual basis, planning after the transaction closes and/or after year-end provides much fewer options.

Determine availability of lifetime gifting exemption

The lifetime exemption for gifting and estate tax is indexed for inflation, and inflation is relatively high, so you most likely have some availability in addition to the annual exclusion. Gifting not only reduces the uncertainty associated with estate execution, but it can also drastically reduce the amount of tax. Generally, a person should seek to gift relatively high-basis assets with potential for increasing fair market value. There are also certain types of gifting strategies that require no utilization of gifting exemption but still allow future appreciation to grow gift and estate tax-free.

Explore state tax elections and their potential impact on your overall tax liability

Many states, in an attempt to circumvent the limited federal deduction on state income taxes, have instituted a multitude of business tax elections. These elections generally provide a federal deduction for tax that would not otherwise be deductible. In doing so, the entity pays tax on behalf of the owners and takes a federal deduction which also passes through. On large transactions and high annual income, these elections can significantly reduce overall tax liability.

Consider charitable giving strategies with maximum tax benefit

Charitable contributions of appreciated stock held for more than a year are afforded a deduction at fair market value, as opposed to the cost. Compared to giving cash, the difference between cost and value completely escapes tax. When considering charitable giving, search your stock portfolio for appreciated positions you would like to sell, and transfer the stock directly to the charity.

Prepare for depreciation options on large capital improvements

Generally, accelerated depreciation deductions provide only a timing benefit, but that is not entirely true because our tax system has a graduated rate structure (the more you make, the higher the rate). So, in a year with lots of improvements, you may be able to reduce the rate you pay. Accelerated depreciation is generally available to furniture, fixtures, equipment, land improvements, tenant improvements, and certain other improvements to the interior of a commercial building, which are used in a trade or business. These expenses can be significant and, as such, can significantly change the taxable income. Discuss improvements and capital projects with your advisor at the outset to ensure maximum benefit.

If you have a difficult return, it’s likely you just filed within the last month. Because the tax year is now over, it’s a good time to consider whether your current advisor fits your needs. Finding such an advisor is paramount to the growth and success of your business and your opportunities to minimize your tax liability on an annual basis.

At Berdon, we are committed to a deep technical understanding of how the Tax Code applies to our clients and how we can structure and plan its application. We take a holistic approach, from the flourishing of a business to estate planning and everything in between, we are committed to excellent service.

If you are not a Berdon client, and your advisor is not meeting your needs, we would welcome the opportunity to discuss whether we could be a fit for each other. I can be reached at 212.331.7525 | gkayton@berdonllp.com

Geoffrey Kayton is a Senior Tax Manager with more than 10 years of professional experience. He advises a diverse array of clients across the real estate sector on a variety of tax matters.

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