The 12 Tax Tips of Christmas:
#7 Defer income

December 19, 2009

The days and holidays are ticking away, but there's still time for some tax tune-up. In today's sing-along of The 12 Tax Tips of Christmas we look at deferring income.

7 swams a-swimming The amount of tax you owe depends on your taxable income. For tax calculation purposes, there are many ways to get that base lower.

Deductions, either standard, itemized or those adjustments at the end or the first page of both the 1040 and 1040A known as above-the-line deductions, are the most common way to cut taxable income. 

But you can simply make less money.

No, I'm not joking. But neither am I suggesting that you quit your job. Rather, manage, when possible, the amount of income you get. A popular money and tax management method is to defer income from a year where you expect to face a big bill, into the next, when you expect to have less income.

If you're self-employed, this is easier to do. You can time jobs or, more commonly, time your billing for those jobs. If you completed work for a client in late November and you have sufficient cash flow to get you through until the end of the year, don't send an invoice until early January. That way, if you use the cash method of accounting, you won't have to report that income until you file your 2010 taxes.

Things are bit more difficult when you're an employee. However, it still might be possible.

If you get a bonus, ask your boss to give it to you early next year. Your employer probably will be able to deduct the bonus this year if the company is on the accrual method of accounting, which most larger ones are, as long as it sets up a procedure before year's end to pay you in the coming year.

What about investments? Unfortunately, if you get dividends and capital gains distributions, you're at the mercy of those payors. But if you're thinking of selling some assets yourself that will produce a gain, be sure to look at the possible tax implications. All things being relatively equal, you might want to wait a couple more weeks.

Again, I must emphasize that you shouldn't make investment moves solely based on tax ramifications. Consider them, yes; be ruled by the taxes, no.

I know that during the holidays, when you're buying gifts and money often seems short, it's not easy to think about turning back cash. But if you can hold out for a few more weeks for a payment or two, it could make a worthwhile tax difference.

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