Year-end tax planning for 2011 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 is 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 December 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 - ½ 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 the 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.
- 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.
- 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.
- Subject to the risk that Congress may implement higher tax rates for 2012 and beyond, 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 for future years may be phased out over varying levels of adjusted gross income ("AGI"). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child 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, or if the tax rates for next year are increased, as discussed above.
- 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 Roth IRA's if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011. Remember also to take your required minimum distributions from your IRA, 401(k) Plan, or other qualified plan.
- It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
- If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so that you can deduct a loss from it for this year.
- 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, ask 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.
- Those facing a penalty for underpayment of federal or state estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
- 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. This includes 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 be deferred rather than accelerated to keep them from being lost because of the AMT.
- Businesses should consider making expenditures that qualify for the business property expensing option (under IRC §179) for assets bought and placed in service this year.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- If you are self-employed and have not done so yet, set up a self-employed retirement plan.
- If you are thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities, the latter may yield a bigger deduction for you.
- If you are age 70½ or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.
- Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2011 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
- Depending on your particular situation, you may also want to consider triggering a debt-cancellation event in 2011, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
- If you have losses from businesses that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions. Contemporaneous documentation of the time devoted to such activities may also prove valuable, if such losses are challenged.
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.