Time again to review your year-end tax plans.The key to end-of-year tax planning is simple: Look at the overall impact on two tax years… 2011 and 2012…as you weigh your options. The goal is to cut your tax bill over both years, not just one. Most filers will save by accelerating write-offs from 2012 into 2011 and deferring income to 2012. If you’ll be in a higher bracket in 2012, consider the opposite…accelerating income and delaying your deductions.
Tax Opportunities for Individuals
Itemizers have the greatest flexibility:
· State and local income taxes. Mailing your Jan. 2012 estimate in late Dec. lets you claim the deduction this year.
· Donations. You can accelerate contributions planned for 2012 into 2011, but you must charge them or mail the checks by Dec. 31 to ensure a 2011 write-off. And consider making your donations using appreciated stock that you have owned for over a year. You deduct the full value and don’t pay any tax on the appreciation.
· Interest. Making the Jan. 2012 mortgage payment on your residence before the end of this year enables you to deduct the interest portion in 2011.
· Medicals. If you’ve exceeded the 7.5%-of-adjusted-gross-income threshold or are close to it, consider getting and paying for elective procedures this year.
Remember that some filers can hop in and out of the standard deduction from year to year. If your 2011 itemizations fall shy of the standard deduction amount, try delaying some and itemizing in 2012. But if their total just exceeds the standard deduction amount for this year, try to accelerate some itemizations and take the standard deduction in 2012. This year’s standard deduction for couples is $11,600, plus $1,150 more for those 65 and older. Singles get $5,800…$7,250 if 65 and up. Heads of households get $8,500 plus $1,450 if they are 65. Next year’s base amounts will be $300 higher for married couples, $200 larger for heads of households and $150 more for singles.
If you owe the alternative minimum tax, you may have to revise your strategy. Paying your Jan. 2012 state tax estimate in 2011 won’t work. And interest on home equity loans is not deductible for the AMT unless you use the proceeds to buy, build or renovate your main home. If you exercise an incentive stock option in 2011, the discount you get is hit by the tax unless you sell the shares by Dec. 31. And you won’t benefit from a 2011 payment of a real estate tax bill due in early 2012.
Taking certain types of deductions makes you more likely to owe the AMT. Many write-offs must be added back when you calculate AMT liability: Sales taxes, state income taxes, property taxes, some medicals and most miscellaneous write-offs. Large gains can also trigger the tax if they cost you some of your AMT exemption.
Make an IRA Qualified Charitable Distribution. If you’re 701/2 or older, you may qualify to donate up to $100,000 from an individual retirement account (IRA) directly to a qualifying charitable organization. The donated amount must be a direct transfer from the IRA trustee to the charity; you should never take possession of the funds. The donated amount can then be excluded from your gross income for 2011, and it can be used to satisfy any required minimum distribution that must otherwise be received from that IRA. At this time, the Qualified Charitable Distribution deduction is scheduled to end on Dec. 31, 2011, so contributions need to be made early. The transaction won’t happen overnight, so be sure to leave plenty of time for paperwork and processing.
The long-standing advice of making the maximum allowable contribution to a 401(k) or 403(b) plan still stands. Taxable income reduction and tax-deferred growth yield benefits now and in the future. For 2011, the maximum contribution to a 401(k) or 403(b) is $16,500, with an additional $5,500 “catch-up” contribution allowed for those 50 and older by Dec. 31, 2011. For a traditional or Roth IRA, the maximum annual contribution is $5,000. For 2012, the maximum contribution to 401(k) and 403(b) plans will increase to $17,000.
Convert to a Roth IRA. Since 2010 it has been possible for any taxpayer, regardless of income, to convert a traditional IRA to a Roth IRA. In doing so, you sacrifice the current deductible contributions of a traditional IRA for the tax-free distributions of a Roth IRA. This is not for everyone, but if you expect to be in a higher tax bracket in retirement and you have sufficient cash to pay the income tax due on the conversion, it may be worth considering.
Get Energy Efficient. Installing energy-efficient improvements to your home may result in a tax credit opportunity. Exterior windows and doors, insulation, furnaces, solar cells, small wind turbines and other upgrades may qualify for up to $500 in credits. If you install some of these products in your home, be sure to get the proper documentation from the retailer. Unless Congress takes action, this deduction will end on Dec. 31, 2011.
Get Credit for Child and Dependent Care Costs. If you pay child care expenses so you (and your spouse) can work, up to $3,000 of expenses ($6,000 for two or more dependents) can qualify for the deduction. You may also be able to deduct expenses related to caring for a disabled spouse or other adult dependent while you work.
Deduct Student Loan Interest. If you’re paying off student loans, up to $2,500 of interest on qualified loans may be deductible in 2011. As usual, there are income limitations: Phase-out begins for joint filers at $120,000, and for singles at $60,000. Unfortunately, you can not deduct your child’s student loan interest, only your own.
Get a Break for Tuition Costs. Deductions of up to $4,000 are available to qualified taxpayers (based on income) for college tuition or job training courses paid in 2011.
Shrink Your Estate. Carefully planned gifting can help reduce your taxable estate to a point where it falls under the current $5 million estate
and gift tax exemption limits ($10 million for married couples). Those limits could drop significantly if the current law sunsets as scheduled on Dec. 31, 2012. In addition, you can give $13,000 each to anyone without it counting toward the $5 million lifetime gifting limit. Consider making these “annual exclusion” gifts to each of your children, putting them into a special trust for their benefit. By removing assets that are likely to appreciate and become a more significant part of your estate, you may be able to reduce future estate taxes.
Delay Income/Accelerate Deductions. Talk to your employer about delaying end-of-year bonuses, incentive pay and other income that could push you to a higher taxable income level in 2011. Accelerating deductible payments of property tax, estimated state income tax and medical expenses may also aid in reducing your taxable income for the year. It’s not certain if the relatively low tax rates in effect until Dec. 31, 2012, will get renewed, so you may end up wanting to take the opposite approach toward the end of 2012 by accelerating income to take advantage of lower rates and deferring deductions to reduce 2013 taxable income.
Think Ahead to the Medicare Surtax in 2013. Starting in 2013, a 3.8 percent Medicare surtax will be assessed on net investment income for those with incomes of $200,000 or more ($250,000 for married couples). Assuming that the law stands until 2013, consider strategies to bring your net investment income (interest and dividends, royalties, annuities and rents, for example) below the threshold.
Tax Opportunities for Businesses
If you are buying assets, it usually pays to put them in service by Dec. 31. The reason: 100% bonus depreciation. Firms can write off the entire cost of qualifying assets placed in use this year, even for assets purchased in late Dec. They can take bonus depreciation on new assets with useful lives of 20 years or less…
Machines, equipment, land improvements and farm structures such as chicken coops. Leasehold improvements made to the interiors of commercial realty are eligible, too. The bonus depreciation percentage is scheduled to fall to 50% for assets put in use in 2012, although there is a good chance Congress will extend the 100% write-off because of the weak economy. Even if that occurs, putting a qualifying asset in service in 2011 rather than in 2012 accelerates the income tax benefit from the deduction.
New heavy SUVs put in service in 2011 are entitled to a huge tax break: You can write off 100% of the cost if no personal use is made of the vehicle, thanks to 100% bonus depreciation. SUVs must have loaded gross vehicle weights over 6,000 pounds to qualify for this break. The $25,000 ceiling on expensing SUVs doesn’t apply if you take bonus depreciation. Used SUVs don’t get bonus depreciation. And you can fully write off new pickup trucks with loaded weights over 6,000 pounds. Ditto for used heavy pickup trucks if the cargo bed is at least six feet in length. For lighter vehicles, the maximum write-off in the first year is $11,060.
Expensing is also available for assets placed in service by Dec. 31. If you are putting used assets in service, you cannot claim 100% bonus depreciation on them, but those assets are eligible for expensing. For 2011, firms can expense up to $500,000 of the assets’ cost. Although this cap is supposed to fall sharply after 2011, Congress is likely to keep the higher cap for 2012. The $500,000 ceiling is reduced dollar for dollar after more than $2 million of assets are placed in service.
Buying too many assets in the last quarter can cost you some write-offs on property that isn’t eligible for bonus depreciation. If you make more than 40% of your 2011 asset purchases after Sept., regular depreciation on all assets put in use in 2011 is figured on a quarterly basis. So assets you buy in late 2011 get 1½ months of depreciation instead of six months’ worth. This rule does not apply to buildings.
Business owners can shift income and expenses between 2011 and 2012. Professionals can opt to delay year-end billings. Or they can speed them up if they expect to be in a higher tax bracket next year. Since 2012 is an election year, we don’t think that lawmakers will be increasing income tax rates for any filers. Firms can shift expenses from one year to another to tweak their income. However, the Revenue Service will balk if there is too much distortion of earnings.
Owners can delay paying year-end bonuses so they aren’t taxed until 2012. But this doesn’t work for a majority owner if the bonus amount is fixed during 2011 and the firm has the cash to pay it…the owner is in constructive receipt of the money. Deductions for accrual method firms are limited. They can’t deduct bonuses in 2011 that are deferred to 2012 by owners of more than 50% of regular corporations or by owners of any interest in an S corporation, personal service firm or partnership. And weigh taking dividends in lieu of salary. This pays off if the corporation is in a low tax bracket and the owner is in a high bracket. The owner’s tax savings due to the 15% top rate on dividends plus the payroll tax savings on the dividend can exceed the extra tax the corporation pays because the dividend isn’t deductible. Note: This won’t work for S firms. Or for personal service firms…they pay a flat 35% tax.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Sigma Accountants LLC to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her tax professional prior to taking any action based upon this information. Sigma Accountants LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.