Our firm sends a letter to our clients at year end outlining some possible tax planning considerations. I thought I'd publish it here as well. If you have any questions, as always please contact me. I hope you find a point or two in here useful!
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. It may be advisable for us to meet to
discuss year-end trades you should consider making.
□ 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 AGI 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
□ 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 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, and energy efficient heaters or
air conditioners. 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
□ You may want to settle an
insurance or damage claim in order to maximize your casualty loss deduction
□ 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- 1/2. 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
□ 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
□ 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.