Red Light Green Light (Tax Edition)
It’s almost the holidays; we’ve got 11 days left of the year; hopefully you’re done with all your tax planning and just coasting into 2025. Even if you are all set, we know you (and likely your clients) are likely still getting bombarded with headlines and social media feeds full of ideas on how to squeeze the last penny of tax savings out of 2024. At this point those are almost universally a bad idea (not 100%, but pretty close).
Now, I’m not talking about tax planning that has a deadline beyond 12/31, like max funding specific types of accounts or finishing out a 60-day rollover. I’m specifically focused on things that HAVE to be done by the 31st, meaning we have very little time to actually get them done. Perhaps more important than the paperwork is the fact that a lot of these last-minute “genius ideas” are really just robbing from your future self.
Recently, I’ve been seeing a lot of recommendations that essentially center around “well, if you’re going to buy it in 2025 anyways, just get it now and BOOM! tax savings.” If the expenses are ordinary and necessary to your business, then absolutely you would be able to deduct them and reduce your taxes in 2024…but it comes at the cost of increasing your taxes in 2025. If I go ahead and pay $2,000 for a conference I know I’ll attend next year before 2024 closes I haven’t performed a magic trick, I’ve shifted a tax liability from one year to another.
That shifting might make a lot of sense, but it hasn’t to be applied to a specific situation and not just applied across the board. This is just one of many areas where a long-term approach to taxes and planning in general becomes so valuable. If we take every decision, event, important date, and tax law change one at a time, it can feel like a terrible game of “red light, green light”.
Always rushing ahead or grinding to a halt because we are making decisions in a vacuum instead of thinking about the bigger picture. If you (or a client) are in a higher tax bracket in 2024 than you expect to be in 2025 AND (this is the crucial piece) you’ve done enough planning for 2025 that you can identify expenses you really were going to incur and aren’t just being impulsive, it can make a lot of sense to accelerate certain purchases and get that into 2024.
Having that long-term perspective is the critical starting point so that we are making decisions within the bigger context and not constantly reacting to the change of the light immediately in front of us.
Happy Tax Planning!
