Year-end tax planning always presents its own unique challenges even with no new legislation scheduled in the immediate future. Next year Congress will have to deal with the expiring 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 for 2012 and beyond, there are some strategies and expiring benefits that you must take advantage by the end of 2011 (unless they are at some point extended by Congress). There is also the annual advice on shifting income & deductions between years, a strategy that may or may not make sense for you, depending on what you expect 2012 to hold.
Year-End Tax Planning Moves for Individuals
Deductions & credits set to expire at the end of 2011:
The option to deduct state and local sales and use taxes instead of state and local income taxes
Tax-free IRA distributions directly to charities by those age 70- 1/2 or older.
Nonbusiness & residential energy tax credits for extra insulation, qualifying windows, doors, heaters, and air conditioners installed before 2012. Note: there is a lifetime limit of $500 on this credit.
The American Opportunity tax credit for higher education expenses which allows up to a $4,000 above the line deduction or up to $2500 credit per student for qualified expenses. Consider prepaying expenses for the spring 2012 semester if you haven’t already reached this.
Other 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 by the end of December, 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. It may be advisable for us to meet to discuss year-end trades you should consider making. Note that 2011 is the first year that third party reported stock sales to the IRS must include the cost basis of the security sold.
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).
Consider making charitable deductions by credit card in December. These are deductible when charged but are not immediate cash out of pocket.
Accelerating your January 2012 estimate (or increasing state withholding through your employer by late December if you expect to owe additional state tax) lets you claim the deduction this year. Note this won’t lower your tax liability if you are subject to alternative minimum tax (AMT).
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 April 1, 2012.
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.
Year-End Tax-Planning Moves for Businesses & Business Owners
Items currently set to expire at the end of 2011:
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). Eligible purchases include personal property and leasehold improvement however you must be the first owner and bought and placed in service by yearend; used assets don’t qualify.
Additionally, the section 179 expense limit will drop from $500,000 to $139,000.
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.
Other Year-End Tax Planning Moves for Businesses
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.
There is an expanded tax credit available for hiring veterans who have been out of work at least 4 weeks and who start work between November 22, 2011 and December 31, 2012. The maximum available for a non-disabled vet is 40% of the first $14,000 of wages paid.
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 for these breaks.
These are just some of the year-end steps that can be taken to save taxes. Please contact us with any questions or for year-end tax planning that applies specifically to your individual or business tax situation.
