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2011 Year-End StrategiesWith the economy still in the doldrums, this year has not been the greatest year for most individuals. Unemployment is still high, incomes are lower, retirement savings have declined and many taxpayers are struggling to make ends meet. The government has provided a variety of tax incentives to help weather the economic storm, and you are urged to take advantage of these special tax benefits as well as other strategies to keep your tax bite as low as possible.
• State Estimated Tax Payments – Although the deadline to make the current year 4th quarter state estimated tax payment is January 15 of the next year for most states, the payment will count as a tax deduction on the federal Schedule A for the current year if that payment is made before the end of December.
• Property Taxes – Generally, your property taxes are billed in installments, and that’s how most people pay them. However, the tax can be paid all at once, if it provides a greater tax benefit for the current year.
Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible to the extent a taxpayer is subject to the AMT. Taxpayers subject to the AMT might, instead, consider deferring deductible tax payments to the subsequent year.
• Bunch Deductions - If your tax deductions normally fall short of itemizing your deductions, or even if you are able to itemize but only marginally, you may benefit from using the “bunching” strategy. For more on this technique, read the article “Bunching Your Deductions Can Provide Big Tax Benefits”.
• Required Minimum Distributions (RMDs) from Retirement Plans – If you are in a low or zero tax bracket this year, it may be to your benefit to take a withdrawal more than the minimum. RMDs generally apply to individuals age 70 ½ and older, but even younger retirees who are not yet required to take a distribution may find this strategy beneficial. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of the Social Security income.
• Tax Credit for First Four Years of College - The American Opportunity Credit (AOC) takes the place of the Hope education credit and provides a credit for tuition and certain other expenses of the first four years of college (Hope only applied to the first two years). So even if you used the Hope credit in prior years you may still qualify for the AOC. The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. 40% of the credit is refundable which means that taxpayers with little or no tax liability can still benefit from the credit. This credit does begin to phase-out for single taxpayers with AGI above $80,000 ($160,000 for joint filers) and no credit is allowed for taxpayers filing married separate.
Important: The AOC is only applicable to tax years 2009 through 2012. Without Congressional action, 2012 is the final year for this more lucrative education credit.
• Energy-Efficient Home Improvements – Homeowners who have or will make certain energy-efficient improvements to their existing homes may qualify for energy credits up to 10% of the cost (credit limited to a lifetime maximum of $500 taking into account credit claimed in prior years). This credit applies to the following qualified energy efficient improvements: exterior windows and skylights, exterior doors, metal and asphalt roofs, heating systems, air-conditioning systems and insulation. With many contractors without work this could be an opportune time to negotiate reasonable prices and make those home modifications, but the work must be completed before year-end if you want the credit. Without Congressional action, this credit expires at the end of 2011.
• Roth IRA Conversions – If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost. Taxpayers are able to convert funds in regular IRAs (as well as qualified retirement plans) to Roth IRAs regardless of their income level.
• Review Estimated Tax Payments and Withholding – Ensure they are sufficient to meet the “safe-harbor” payment amounts so as to avoid underpayment penalties.
• IRA and Self-Employed Retirement Plan Contributions – The primary purpose of these plans is to provide for your future retirement and whenever you are eligible and financially able, you should always contribute as much as possible. Contributions also provide a tax deduction when they are made to Self-employed plans and to most traditional IRAs. The benefit derived from this tax deduction is based upon your tax bracket. (Some contributions to traditional IRAs may not be deductible if you also participate in another retirement plan, depending on your income level.) Those individuals who simply prefer the Roth option, but are barred from making Roth contributions because their income exceeds the AGI phase out limitations, might consider making a non-deductible traditional IRA contribution and then converting it to a Roth IRA since as of 2010 there are no income limitations on conversions.
• Establish a Retirement Plan – If you do not already have a retirement plan and you are considering one, there are several options. Some, such as Keogh or 401(k) plans, must be set up before the year’s end. If you are an owner-only business, you should review the article “Owner-Only Businesses Should Consider a Solo 401(k) Plan,” which provides great benefits for business owners with no employees other than their spouse.
• Capital Loss Carryovers – If you have carryover capital losses remember you can only claim a maximum $3,000 net capital loss on your return and the remainder carries over to the subsequent year. However, you may have some gains you can take to offset the carryover. (If you sell at a gain but wish to repurchase stock in the same company, note that the wash sale rules don’t apply—they only apply to losses— so you will not need to wait 30 days to make the repurchase.) For long-term planning, it is important to keep in mind that the current lower capital gains rates of 0% and 15% are only available through 2012. After that, without Congressional intervention, the rates return to the pre-2003 levels of 10% and 20%. For more details on this strategy, read the “Fine-Tuning Capital Gains and Losses” article.
• Non-Cash Charitable Donations – If you itemize your deductions and your garage and closets contain never-used items, you might consider donating those items to charity before year-end to increase your deductions. To claim a deduction for donated clothing and household goods, they must be in good condition or better, and the donations must be substantiated by a written receipt that includes the name of the charity, dates and location of the donation and a reasonably detailed description of the property donated. A receipt is not required where the value is less than $250 and it is impractical to obtain one (for example, when items are left at an unattended drop site). If, instead, you decide to sell some of the property, the income is generally tax free provided you sell each item for less than your cost or basis in the property.
• Deduct IRA Losses – If a traditional IRA account that includes non-deductible contributions declines in value and the value of all of your IRA accounts combined is less than the sum of your non-deductible contributions, you can take a loss by withdrawing from (closing) all your IRA accounts. However, this loss is beneficial only if you itemize your deductions and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year.
The foregoing are frequently encountered tax strategies that can be employed by most, but by no means all, taxpayers. Please call this office if have questions regarding these issue or others or would like to engage in some year-end tax planning. If you have a substantial increase or decrease in income this year it may be wise to schedule an appointment before the holidays to strategize.