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Year End Tax Planning
Tax planning this is year will likely prove to be difficult due to the uncertainty in Congress regarding tax reform. There are many upcoming issues that could change the tax game that have not been decided on yet. For instance, Congress will need to decide whether or not to “patch” the AMT tax again, and how to handle the looming expiration of Bush’s income tax cuts. This could potentially raise tax rates on long-term capital gains and qualified dividends, among other effects.
Remember that cash flow planning can be just as important as tax planning. If you feel you might owe with the filing of your return for any reason, completing some tax planning now can help you plan for your cash flow.
Through all of that uncertainty, there are still existing tax savings to be claimed for 2011:
- Claiming a deduction for state and local income taxes
- Tax free IRA charitable distributions for those who are 70.5 or older
- And above-the-line deduction of higher education expenses, to name a few.
Businesses also have breaks available to them in 2011 that they may not have in 2012. Some of which are 100% bonus first year depreciation, the research tax credit, and the $500,000 expensing limitation.
Listed below are some items to consider when planning for your next year’s taxes:
Individuals:
- Evaluate the amount you set aside for you health flexible spending account. If you set aside too little this year, increase that amount for 2012.
- For those who became eligible for a health spending account later in the year, take full advantage of the credit by making a full year’s worth of contributions before the end of the year.
- Take as many deductions as possible during 2011 and postpone income (such as bonuses) until 2012 in order to reduce tax due for 2011. This is in order to take fuller advantage of tax breaks and credits that are phased out based on your annual income. Some examples are child-tax credits, higher education credits, student loan interest, etc. However, if you income will be higher in 2012 for any reason, it may make sense to not lower your 2011 income. Tax planning with a professional can help decide this.
- Depending on your preferences. You may want to transfer money from mutual funds or traditional IRAs into a Roth IRA. It is important to know that this will increase your taxable income for the year and so careful planning should be completed.
- You are allowed to re-characterize a rollover or conversion of an IRA to a Roth IRA if your Roth IRA has declined in value. This allows you to pay less tax than you would have if left in a Roth IRA.
- You may want to use a credit card to pre-pay expenses in order to generate more deductions for the year.
- You can have additional taxes withheld for state and local taxes in order to avoid owing tax when it comes to filing time. An alternative is paying estimated quarterly taxes.
- If you are facing penalties for underpayment of tax, you may want to take an eligible rollover distribution from your retirement plan. This will have tax withheld, and as long as you rollover within the allowed time frame, will generate no additional taxable income.
- Take the alternative minimum tax (AMT) into consideration when planning year-end changes. This is because the AMT may make some deductions worthless and cause this tax to sneak in and change the projected circumstances.
- If you itemize your deductions and you live in a state that has a sales tax, you should consider making any big purchases that you have planned in 2011 in order to take advantage of the tax break for sales taxes.
- Homeowners should make any energy saving home improvements in 2011 to take advantage of the non-business property energy credit as this credit may not be extended past 2011.
- Pay qualified higher education expenses within 2011 in order to assure that you receive the above-the-line credit for these expenses. This credit has yet to be extended.
- If you have any contested taxes, you may want to pay those in order to take the deduction for them.
- If you have any open insurance or damage claims you should try to close these before the end of the year so you may take fuller advantage of your casualty losses.
- Purchase qualified small business stock from a C-Corporation that has gross assets of 50 million dollars or less. As long as these are purchased before 1/1/2012 and held for at least 5 years you do not have to pay tax gains on them.
- If you have an IRA and are older than 70.5, you can obtain a tax savings by making a charitable contribution straight from the IRA. This is especially helpful for seniors who do not itemize their deductions.
- Make sure you take the required minimum distributions from IRAs. You are allowed to postpone these if you turned 70.5 in 2011 until 2012, but you then must take a double distribution in 2012 which will cause a higher taxable income for that year.
- Make qualified gifts that are covered by the annual gift tax exclusion of $13,000 or less by the end of the year.
Businesses & Business Owners:
- Make expenditures that qualify as expenses for the business while the limit is still $500,000. This high limit may be decreased next year.
- Another expenditure to be made is one that qualifies for the bonus 100% first year depreciation. The items must be bought and placed into service during 2011.
- Hire qualified workers like veterans to take advantage of the work opportunity tax credit. The employee must be hired during 2011.
- Qualified research expenses also have a higher ceiling this year that may not remain as high next year.
- For those who are self-employed, set up a self-employed retirement plan.
- It could also be prudent to wait to have a debt cancelled until 2012, depending on the specific circumstances.
- Increasing your basis in an S-Corporation or Partnership could enable you to deduct losses that year.
If you have any questions at all, please get in touch with our office so we can put together a plan that meets your specific needs.
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