July 2011
To our Clients and Friends:
Thanks to the extension of the so-called Bush tax cuts through 2012, the current federal income tax environment remains favorable. Now is the time to take advantage because we don't know what tax rates will be in 2013 and beyond. While 2013 may seem a long way out, it will be here before you know it. This letter presents some tax planning ideas to consider this summer while you have time to think. Some of the ideas may apply to you, some to family members, and others to your business. Here it goes.
Leverage Standard Deduction by Bunching Deductible Expenditures
Are your 2011 itemized deductions likely to end up being just over or under the standard deduction amount? If so, consider bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2011 standard deductions are $11,600 for married joint filers, $5,800 for single filers, and $8,500 for heads of households. Examples of deductible items that can easily be bunched together include charitable contributions, state income tax, and property tax payments.
Consider Deferring Income
It may also pay to defer some taxable income from this year into next year, especially if you expect to be in a lower tax bracket in 2012. This is most easily achieved if you are in business for yourself and can push income to 2012 while accelerating deductions for business expenses. Deferring income is especially helpful if you're affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so forth). By deferring income every other year, you may be able to take more advantage of these breaks at least occasionally.
Time Investment Gains and Losses and Consider Being Bold about It
As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year. The maximum federal income tax rate on long-term capital gains realized from 2011 sales of securities held for over a year is only 15%. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling.
Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less, which would otherwise be taxed at higher rates. You may have significant short-term gains if you bought into the stock market before this year's uptick. If you have enough capital losses you don't have to worry about paying a higher tax rate on short-term gains.
If capital losses for this year exceed capital gains, you have a net capital loss for 2011 which can be used to shelter up to $3,000 of this year's high-taxed ordinary income from salaries, bonuses, self-employment, etc. ($1,500 if you're married and file separately). Any excess net capital loss is carried forward to next year.
Take Advantage of Generous but Temporary Business Tax Breaks
Several favorable business tax provisions have a limited shelf life that may dictate taking action between now and year-end. They include the following.
Larger Section 179 Deduction Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2011, the maximum Section 179 deduction is $500,000 (same as 2010). For tax years beginning in 2012, however, the maximum deduction is scheduled to drop back to $125,000.
Note: Watch out if your business is expected to have a tax loss for the year (or close) before considering any Section 179 deduction as you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.
Section 179 Deduction for Real Estate Real property improvement costs are generally ineligible for the Section 179 deduction privilege. However an exception applies to tax years beginning in 2011 (and 2010). Under this exception, your business can immediately deduct up to $250,000 of qualified improvement costs for the following types of real property under Section 179:
· Interiors of leased nonresidential buildings.
· Restaurant buildings.
· Interiors of retail buildings.
The $250,000 Section 179 allowance for real estate improvements is part of the overall $500,000 allowance. This temporary real estate break will not be available for tax years beginning after 2011 unless Congress extends it.
100% First-year Bonus Depreciation In addition to the increased Section 179 deduction, your business can also claim first-year bonus depreciation equal to 100% of the cost of most new (not used) equipment and software placed in service by December 31, 2011. The 100% bonus depreciation break will expire at year-end unless Congress extends it. Contact us if you want more details about this generous, but temporary, break.
Don't Overlook Estate Planning
For 2011 and 2012, the unified federal gift and estate tax exemption is a relatively generous $5 million. However, the exemption will drop back to only $1 million in 2013 unless Congress takes action. In addition, the maximum federal estate tax rate for 2011 and 2012 is 35%. For 2013 and beyond, it is scheduled to rise from the current 35% to a painfully high 55%. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. Even if you already have a good plan, it may need updating to reflect the current $5 million exemption. Contact us for more information on the best ways to you can minimize estate taxes.
IRS increases standard mileage rate
This won't take planning, but something to note: effective July 1st, the IRS increased the standard business mileage rate from $0.51 to $0.555 per mile. The medical/moving mileage rate also increased from $0.19 to $0.235; the charitable mileage rate remains the same at $0.14. The business rate is used as a benchmark by many businesses and the federal government to reimburse employees for mileage. The IRS made a special increase mid-year due to the increase in gas prices.
Conclusion
As we said at the beginning, this letter is intended to give you just a few ideas to get you thinking about tax planning moves for the rest of this year. Please don't hesitate to contact us if you want more details or would like to schedule a tax planning strategy session.
Best regards,
The staff at Houlihan, LLP
