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Year End Tax Planning

Personal Tax Strategies

Moving income or deductions between tax years

Compensation and billing – If your employer is willing, compensation you earn in 2011 can sometimes be paid to you in early 2012.  Your employer may be entitled to the tax deduction in 2011.  If your business operates on the cash method, you can delay (within reason) sending out bills for 2011 work until late in the year, so payment comes in 2012.  Alternatively, you can offer a discount to a client who prepays if you are trying to increase 2011 income.

Capital gains and losses –

Installment sales –

Credit card payments – Paying tax-deductible expenditures – including charitable contributions – with a credit card secures the deduction, even if you do not actually pay the credit card company until the following year.

Suspended passive activity losses – If you own a passive activity with a suspended loss, and you do not have sufficient passive income in 2011 to allow you to deduct the suspended loss, consider disposing of the activity before Dec. 31.

Other year-end strategies for individuals

Charitable contributions from IRAs – The provision for making charitable contributions from an IRA is set to expire on Dec. 31, 2011.  If you are age 70½ or older, you can have charitable contributions made directly to a charity by your IRA custodian:

Appreciated assets contributed to charity – Consider fulfilling your charitable goals by contributing appreciated assets instead of cash.  You can deduct the fair market value of long-term capital gain property contributed to charity and you avoid paying taxes on the appreciation.

Tax credits for home improvements – A tax credit for qualifying home improvements may be available for improvements placed in service during 2011 but not in 2012.  The credit applies to energy-efficient improvements such as insulation, exterior windows, and heating and air conditioning systems.  You will need to complete your purchase before Dec. 31 to qualify for the credit in 2011.  The new energy efficiency tax credit is a 10 percent credit, up to a lifetime maximum of $500.  The prior cap had been up to $1,500, so check to see whether you have claimed this credit in prior years.

Tax credits for alternative vehicles – Several tax credits are available to purchasers of various types of motor vehicles that use fuel-saving or alternative-fuel technologies.  Check with the manufacturer to see what tax credits may be available if you are considering the purchase of a new vehicle.

Zero percent tax rate on capital gains and dividends – This rate, if not applicable to you personally, may benefit your older children, aging parents or others.  The maximum rate of tax on qualified dividends and most long-term capital gains is 15 percent.  For those whose marginal income tax rate does not exceed 15 percent, the tax rate on these special types of income is reduced to zero.  The zero-percent rate applies to a single person with less than $34,501 in taxable income for 2011 and married persons filing jointly with taxable income under $69,001.

The kiddie tax rules may prevent your children from qualifying because the rules require taxation at the parents’ tax rate.  However, if you assist aging parents or others, you might consider gifting appreciated capital gain property to them if they are in the 10 or 15 percent tax brackets.  They could then sell the investment and qualify for the zero-percent tax rate on the gain.

Income tax prepayments – If your estimated tax payments and withholding are not high enough to avoid penalties, increase payments.  Even better, if you receive wages, IRA distributions, annuity payments or other payments have the additional taxes withheld because withholding is deemed to be ratable throughout the year.

If you have a fourth quarter state estimated tax payment due Jan. 15, 2012, consider making the payment late in December if you need additional itemized deductions in 2011.

The alternative minimum tax – An increasing number of middle-income earners, especially retirees, are subject to the AMT. High itemized deductions (other than charitable contributions), high personal exemptions and large capital gains, among other items, can trigger the AMT.  New retirees are often subject to the AMT because they experience lower income while their itemized deductions remain high.

Your retirement plans – To qualify for a deduction in 2011, your retirement plan generally must be in place before the end of the year.  Exceptions are IRA and SEP (simplified employee pension) plans, which generally must be funded by April 15, 2012.

 

The following contribution limits apply for 2011:

 

401(k)

IRA

SIMPLE IRA

Self-employed

$16,500

($22,000 if age 50+)

$5,000

($6,000 if age 50+)

$11,000

($14,000 if age 50+)

20 percent of income up to $49,000

 

Roth IRA conversion – Roth IRAs have a number of advantages over traditional IRAs, including no tax when the money is withdrawn.  Consider the following:

 

Saver’s credit – If you or your working children contribute to a retirement plan at work – 401(k) or 403(b), 457, SEP IRA, SIMPLE) or a traditional IRA – and your income is less than $56,500 for married couples or $28,250 for singles, you may qualify for the saver’s credit.  You must be at least 18 years of age, not a full-time student and not claimed as a dependent on someone else’s tax return.  The tax credit ranges from 10 percent of your contribution to as high as 50 percent of your contribution up to a maximum credit of $1,000.

 

Additional taxes coming in 2013

 

Some future tax changes have already been enacted but have yet to take effect:

 

Consider talking with your tax adviser about strategies for minimizing this tax.

 

 

Estate & Gift Tax Planning Strategies

 

Estate planning – The estate and gift tax exemption amount for 2011 is $5 million – essentially $10 million for a married couple.  Again, there is uncertainty in the future about where the estate tax exemption and tax rates will end up.  And with the recent changes, it is a good idea to review your plan to ensure it is up to date.  Because the estate and gift tax exemptions were recently reunified, now may be an appropriate time to make gifts to take advantage of the $5/$10 million lifetime exemption.  Making large gifts under the exemption amount not only removes the value of these gifts from your estate but also future appreciation of the gifted assets.

 

Gift tax – The annual gift tax exclusion for 2011 remains at $13,000 per person.  If you are married, you can gift up to $26,000 per donee, per year by using the gift-splitting rules, without any federal gift tax ramifications.  Gifting reduces your taxable estate and may be important in an effective estate plan.

 

Business Tax Strategies

 

Retirement plans for your business –Retirement plans have significant tax advantages: Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee (for plans other than Roths) and investments in the program grow tax-free or tax-deferred.  Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE or other retirement plan to cover the initial setup expenses.

 

Depreciation – Certain enhancements to business depreciation provisions are scheduled to expire Dec. 31, 2011, although President Obama has proposed an extension through 2012.

 

·        Section 179 – A $500,000 expensing election limit applies to qualifying property purchased and placed in service during 2011.  As a result, many businesses will receive an immediate tax write-off for the cost of most new and used tangible personal property. Unless Congress acts to further extend the higher limit, it will drop to about $134,000 in 2012.

Companies that purchase more than $2 million of qualifying property during 2011 have their deduction amount reduced, dollar-for-dollar, for purchases in excess of $2 million.

 

 

Cost segregation – Buildings and other real estate generally do not qualify for bonus depreciation or the expensing election.  However, a cost-segregation study may be able to identify qualifying property within the overall project, which can often significantly increase your deduction.

 

Research and development tax credit – Many business owners in nearly every industry are unaware that federal and state research and development (R&D) tax credit programs exist that may reward their day-to-day efforts aimed at producing an improved product.  This credit is scheduled to expire Dec. 31, 2011.

 

Health insurance tax credit – To encourage smaller businesses to offer medical insurance coverage for their employees, the law offers a tax credit to offset all or part of the cost.  If your business qualifies as a small employer, meaning fewer than 25 employees and average annual wages of less than $50,000, you are eligible for a credit of up to 35 percent of nonelective contributions you make on behalf of your employees for medical insurance premiums.  The credit varies based on the numbers of employees and average compensation.

 

Credit for hiring new employees – Businesses that hire workers who are members of certain target groups, such as disabled veterans, food stamp recipients and ex-felons, can claim a credit up to 40 percent of the first $6,000 of wages paid to each such employee.

 

Losses from pass-through entities –If you are an owner of a pass-through business entity operating as a partnership, LLC, S corporation or trust, and the business will incur a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss on your personal tax return.  These rules can be complicated, and you should consult with your tax adviser – there are steps you can take to deduct passive losses or increase your basis.

 

Paying corporate dividends – Profits of traditional C corporations (those that have not elected S corporation pass-through status) are taxed twice: once when earned by the corporation and again when distributed as a dividend to the shareholders.  Many have seen the current 15 percent tax rate on qualified dividends as an opportunity to pay out accumulated earnings at relatively low tax rates.  It is likely that the tax rate on dividends will increase in the future, so you may wish to discuss with your tax adviser the possibility of distributing profits to lock in the current 15 percent rate.

 

Conclusion

 

When Congress dealt with the Bush tax cuts at the end of 2010, the effect was to delay a “permanent” decision for another two years.  These provisions, originally enacted in 2001, reduced marginal tax rates for all taxpayers, provided relief from the marriage penalty, increased child tax credits, expanded education-related tax benefits and phased out the estate tax.

 

The current laws, including the recently enacted estate tax changes, are now set to expire, or sunset, on Dec. 31, 2012.  If Congress does not act, most of these tax benefits will disappear, and taxes will automatically increase to pre-2001 levels on Jan. 1, 2013.  Although we have covered a number of topics in this letter, we undoubtedly did not address every issue relating to your specific situation.  Tax projections are recommended to determine your greatest tax savings. We would be pleased to meet with you to discuss these topics and help you plan.

 

 

Sincerely,

 

The Team at Bradstreet CPAs

Comments»

1. Steven J Fromm - December 25, 2011

Your readers may also be interested in what are called charitable remainder trusts. These trusts are used to place monies in trust for the benefit of the donor and the tax-exempt organization. Basically, the donor (and his wife if desired) can be paid an income from the trust for their lives or for a term of years. When this time frame ends the charity named as the residual beneficiary gets the balance in the trust. The advantage for the donor is that they reserve income to themselves and get a tax deduction in the year the trust is funded for the actuarial value of the residue going to charity. There are various types of charitable remainder trusts and the provisions can be fine tuned to meet various needs.
Finally there is something called a charitable lead trust, that works in the opposite way; the charity is paid first and for a number of years and then the balance goes to family or other non-charitable remainder beneficiaries.