Year-end tax planning
is especially challenging this year because of uncertainty over whether
Congress will enact sweeping tax reform that could have a major impact in 2012
and beyond. And even if there's no major tax legislation in the immediate
future, Congress next year still will have to grapple with a host of thorny
issues, such as whether to once again “patch” the alternative minimum tax
(e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do
about the post-2012 expiration of the Bush-era income tax cuts (including the
current rate schedules, and low tax rates for long-term capital gains and
qualified dividends), and the expiration of favorable estate and gift rules for
estates of decedents dying, gifts made, or generation-skipping transfers made
after Dec. 31, 2012.
Regardless of what
Congress does late this year or early the next, there are solid tax savings to
be realized by taking advantage of tax breaks that are on the books for 2011
but may be gone next year unless they are extended by Congress. These include,
for individuals: the option to deduct state and local sales and use taxes
instead of state and local income taxes; the above-the-line deduction for
qualified higher education expenses; and tax-free distributions by those age 70
1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that
are available through the end of this year but won't be around next year unless
Congress acts include: 100% bonus first year depreciation for most new
machinery, equipment and software; an extraordinarily high $500,000 expensing
limitation (and within that dollar limit, $250,000 of expensing for qualified
real property); and the research tax credit.
We have compiled a
checklist of actions based on current tax rules that may help you save tax
dollars if you act before year-end. Not all actions will apply in your
particular situation, but you will likely benefit from many of them. We can
narrow down the specific actions that you can take once we meet with you to
tailor a particular plan. In the meantime, please review the following list and
contact us at your earliest convenience so that we can advise you on which
tax-saving moves to make:
Year-End Tax Planning
Moves for Individuals
• Increase the amount
you set aside for next year in your employer's health flexible spending account
(FSA) if you set aside too little for this year. Don't forget that you can no
longer set aside amounts to get tax-free reimbursements for over-the-counter
drugs, such as aspirin and antacids.
• If you become
eligible to make health savings account (HSA) contributions in December of this
year, you can make a full year's worth of deductible HSA contributions for
2011.
• Realize losses on
stock while substantially preserving your investment position. There are
several ways this can be done. For example, you can sell the original holding,
then buy back the same securities at least 31 days later.
• Postpone income
until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill.
This strategy may enable you to claim larger deductions, credits, and other tax
breaks for 2011 that are phased out over varying levels of adjusted gross
income (AGI). These include child tax credits, higher education tax credits,
the above-the-line deduction for higher-education expenses, and deductions for
student loan interest. Postponing income also is desirable for those taxpayers
who anticipate being in a lower tax bracket next year due to changed financial
circumstances. Note, however, that in some cases, it may pay to actually
accelerate income into 2011. For example, this may be the case where a person's
marginal tax rate is much lower this year than it will be next year.
• If you believe a
Roth IRA is better than a traditional IRA, and want to remain in the market for
the long term, consider converting traditional-IRA money invested in
beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep
in mind, however, that such a conversion will increase your adjusted gross
income for 2011.
• If you converted
assets in a traditional IRA to a Roth IRA earlier in the year, the assets in
the Roth IRA account may have declined in value, and if you leave things as-is,
you will wind up paying a higher tax than is necessary. You can back out of the
transaction by recharacterizing the rollover or conversion, that is, by
transferring the converted amount (plus earnings, or minus losses) from the
Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can
later reconvert to a Roth IRA.
• It may be
advantageous to try to arrange with your employer to defer a bonus that may be
coming your way until 2012.
• Consider using a
credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe
state and local income taxes when you file your return next year, consider
asking your employer to increase withholding of state and local taxes (or pay
estimated tax payments of state and local taxes) before year-end to pull the
deduction of those taxes into 2011 if doing so won't create an alternative
minimum tax (AMT) problem.
• Take an eligible
rollover distribution from a qualified retirement plan before the end of 2011
if you are facing a penalty for underpayment of estimated tax and the increased
withholding option is unavailable or won't sufficiently address the problem.
Income tax will be withheld from the distribution and will be applied toward
the taxes owed for 2011. You can then timely roll over the gross amount of the
distribution, as increased by the amount of withheld tax, to a traditional IRA.
No part of the distribution will be includible in income for 2011, but the
withheld tax will be applied pro rata over the full 2011 tax year to reduce
previous underpayments of estimated tax.
• Estimate the effect
of any year-end planning moves on the alternative minimum tax (AMT) for 2011,
keeping in mind that many tax breaks allowed for purposes of calculating
regular taxes are disallowed for AMT purposes. These include the deduction for
state property taxes on your residence, state income taxes (or state sales tax
if you elect this deduction option), miscellaneous itemized deductions, and
personal exemption deductions. Other deductions, such as for medical expenses,
are calculated in a more restrictive way for AMT purposes than for regular tax
purposes. As a result, in some cases, deductions should not be accelerated.
• Accelerate big
ticket purchases into 2011 in order to assure a deduction for sales taxes on
the purchases if you will elect to claim a state and local general sales tax
deduction instead of a state and local income tax deduction. Unless Congress
acts, this election won't be available after 2011.
• You may be able to
save taxes this year and next by applying a bunching strategy to
“miscellaneous” itemized deductions, medical expenses and other itemized
deductions.
• If you are a
homeowner, make energy saving improvements to the residence, such as putting in
extra insulation or installing energy saving windows, or an energy efficient
heater or air conditioner. You may qualify for a tax credit if the assets are
installed in your home before 2012.
• Unless Congress
extends it, the up-to-$4,000 above-the-line deduction for qualified higher
education expenses will not be available after 2011. Thus, consider prepaying
eligible expenses if doing so will increase your deduction for qualified higher
education expenses. Generally, the deduction is allowed for qualified education
expenses paid in 2011 in connection with enrollment at an institution of higher
education during 2011 or for an academic period beginning in 2011 or in the
first 3 months of 2012.
• You may want to pay
contested taxes to be able to deduct them this year while continuing to contest
them next year.
• You may want to settle
an insurance or damage claim in order to maximize your casualty loss deduction
this year.
Purchase qualified
small business stock (QSBS) before the end of this year. There is no tax on
gain from the sale of such stock if it is (1) purchased after September 27,
2010 and before January 1, 2012, and (2) held for more than five years. In
addition, such sales won't cause AMT preference problems. To qualify for these
breaks, the stock must be issued by a regular (C) corporation with total gross
assets of $50 million or less, and a number of other technical requirements
must be met. Our office can fill you in on the details.
• If you are age
70-1/2 or older, own IRAs and are thinking of making a charitable gift,
consider arranging for the gift to be made directly by the IRA trustee. Such a
transfer, if made before year-end, can achieve important tax savings.
• Take required
minimum distributions (RMDs) from your IRA or 401(k) plan (or other
employer-sponsored retired plan) if you have reached age 70-½. Failure to take
a required withdrawal can result in a penalty of 50% of the amount of the RMD
not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first
required distribution to 2012, but if you do, you will have to take a double
distribution in 2012—the amount required for 2011 plus the amount required for
2012. Think twice before delaying 2011 distributions to 2012—bunching income
into 2012 might push you into a higher tax bracket or have a detrimental impact
on various income tax deductions that are reduced at higher income levels.
However, it could be beneficial to take both distributions in 2012 if you will
be in a substantially lower bracket that year, for example, because you plan to
retire late this year.
• Make gifts sheltered
by the annual gift tax exclusion before the end of the year and thereby save
gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited
number of individuals but you can't carry over unused exclusions from one year
to the next. The transfers also may save family income taxes where
income-earning property is given to family members in lower income tax brackets
who are not subject to the kiddie tax.
Year-End Tax-Planning
Moves for Businesses & Business Owners
• Businesses should
consider making expenditures that qualify for the business property expensing
option. For tax years beginning in 2011, the expensing limit is $500,000 and
the investment ceiling limit is $2,000,000. And a limited amount of expensing
may be claimed for qualified real property. However, unless Congress changes
the rules, for tax years beginning in 2012, the dollar limit will drop to
$139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing
won't be available for qualified real property. The generous dollar ceilings
that apply this year mean that many small and medium sized businesses that make
timely purchases will be able to currently deduct most if not all their outlays
for machinery and equipment. What's more, the expensing deduction is not
prorated for the time that the asset is in service during the year. This opens
up significant year-end planning opportunities.
• Businesses also
should consider making expenditures that qualify for 100% bonus first year
depreciation if bought and placed in service this year. This 100% first-year
writeoff generally won't be available next year unless Congress acts to extend
it. Thus, enterprises planning to purchase new depreciable property this year
or the next should try to accelerate their buying plans, if doing so makes
sound business sense.
• Nail down a work
opportunity tax credit (WOTC) by hiring qualifying workers (such as certain
veterans) before the end of 2011. Under current law, the WOTC won't be
available for workers hired after this year.
• Make qualified research
expenses before the end of 2011 to claim a research credit, which won't be
available for post-2011 expenditures unless Congress extends the credit.
• If you are
self-employed and haven't done so yet, set up a self-employed retirement plan.
• Depending on your
particular situation, you may also want to consider deferring a
debt-cancellation event until 2012, and disposing of a passive activity to
allow you to deduct suspended losses.
• If you own an
interest in a partnership or S corporation you may need to increase your basis
in the entity so you can deduct a loss from it for this year.
These are just some of
the year-end steps that can be taken to save taxes.