How can I reduce my 2007 income tax? Income shifting

One of the most fundamental year-end tax planning techniques involves accelerating deductible expenses in 2007 and deferring income, if economically feasible, into 2008. By delaying taxable income you defer taxes. Delaying taxable income may also prevent you from losing lucrative tax breaks that can be reduced or eliminated altogether as your income level rises and propels you into a higher tax bracket.

With only a month left until the end of the year, you can probably anticipate with reasonable certainty what income and deductions you will be reporting on your 2007 tax return. You may also be able to predict with relative accuracy what your income and expenses for the first few months of 2008 will include. The ability to gauge your income and expenses for 2007 and into 2008 provides a golden opportunity to shift income or expenses into one year or the other, depending on what will enable you to save the most overall taxes.

Shifting income, however, is not always a matter of simply delaying receipt of funds. Tax rules may require you to recognize certain types of income when you have earned to right to receive it, even if you arrange for its delayed payment.

Answer provided by Andrew Taylor, CPA - Haffley, Taylor & Company, LLC