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To Defer or not to Defer: That is the taxable question

by Brett Backues on December 11, 2011
Making money is a good thing. And successful business owners are not usually in the habit of asking their clients to postpone paying an outstanding invoice. But when it comes to tax planning, deferring or accelerating the income you report may actually be beneficial to your bottom line.
For example, if you expect your Adjusted Gross Income (AGI) to be higher in 2011 than you project for 2012, or if you anticipate moving to a higher tax bracket next year, you may very well benefit by deferring income into the 2012 tax year.  
Deferring income can be advantageous as long as the deferral does not bump your income to the next bracket. Deferred income could turn around and bite you if the extra income is subject to §409A, which would make the postponed dollars part of another layer of gross income and subject to additional tax.  
Here are some acceptable—and legal—ways to defer income:
1. Delay Billing: If you are self-employed and operate on a cash basis, you can wait until year end to bill clients so that payments will not be received until after the new year.
2. Interest and Dividends:  Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until is actually received. That does not mean avoiding trips to the mailbox.  To defer interest income, consider buying short-term bonds or certificates that will not mature until next year.  If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
Accelerating Income 
In rare and wonderful circumstances, some taxpayers can benefit by accelerating income into 2011.  For example, if you anticipate being in a higher tax bracket in 2012 or you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years.
Please note that accelerating income into 2011 will be disadvantageous if you expect to be in the same or lower tax bracket for 2012.  
In any event, let’s talk and “crunch some numbers” before you decide to admit to the IRS that you’ve made more money than you’ve actually received. If you decide that you are one of the few who could benefit from accelerating income, here are some accepted ways to accomplish it:
1. Accelerate collection of accounts receivable:  If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection well before the end of 2011. Reach out to your clients to offer them the advantage of paying for foods and services early to benefit their own tax situation.  Any income received using these steps will shift income from 2012 into 2011.
2. Year-end bonuses:  Here is one your employer may thank you for. Ask to have your bonus paid to you before the beginning of 2012.
3. Retirement plan distributions:  If you are over age 59½ and participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2012 to lower future tax bills. 
a. You may also want to consider making a Roth IRA rollover distribution. This action was examined in more detail in a previous post on retirement.