10 Year-End Tax Planning Topics
November 26, 2011
1. Deferring income to 2012 means postponing taxes
Consider opportunities you might have to defer income to 2012. You might be
able to delay a year-end bonus, for example. If you’re able to push what would
have been 2011 income into 2012, you may be able to put off paying income tax on
the deferred dollars until next year.
2. Paying deductible expenses sooner may help you in 2011
Does it make sense for you to accelerate deductions into 2011? If you itemize
deductions, it might help your 2011 bottom line to pay deductible expenses like
medical costs, qualifying interest, and state and local taxes before the end of
the year, instead of waiting until 2012.
3. Income tax rates to remain the same in 2012
The same six federal income tax rates that apply in 2011 will apply in 2012.
So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%,
33%, or 35% rate bracket. And, as in 2011, long-term capital gains and
qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012;
and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will
generally continue to apply.
If you’re subject to the alternative minimum tax (AMT), special rules apply.
For example, the AMT rules can effectively disallow a number of itemized
deductions, making it a potentially significant consideration when it comes to
year-end planning. You’re more likely to be subject to AMT if you claim a large
number of personal exemptions, deductible medical expenses, state and local
taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT
in the past, or think that you might be for 2011, you’ll want to make sure that
you understand how the AMT rules might affect you.
5. IRA and retirement plan contributions
Employer-sponsored retirement plans like 401(k) plans and traditional IRAs
(if you qualify to make deductible contributions) present an opportunity to
contribute funds on a pre-tax basis, reducing your 2011 taxable income.
Contributions that you make to a Roth IRA (assuming you meet the income
requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re
still worth considering, though, because qualified distributions are free from
federal income tax. The window to make 2011 contributions to your employer plan
closes at the end of the year, but you can generally make 2011 contributions to
your IRA up to April 17, 2012.
6. Special distribution requirements at age 70½
Once you reach age 70½, you’re generally required to start taking required
minimum distributions (RMDs) from any traditional IRAs or employer-sponsored
retirement plans you own. It’s important to make withdrawals by the date
required–the end of the year for most individuals. The penalty is steep for
failing to do so: 50% of the amount that should have been distributed. Barring
additional legislation, 2011 will be the last year to take advantage of a
popular provision allowing individuals age 70½ or older to make qualified
charitable distributions of up to $100,000 from an IRA directly to a qualified
charity (these charitable distributions are excluded from your income, and count
toward satisfying any RMDs that you would otherwise have to take from your IRA
for 2011).
7. Depreciation and expense limits to drop for business owners and the self-employed
If you’re a small business owner or a self-employed individual, you’re
allowed a first-year depreciation deduction of 100% of the cost of qualifying
property acquired and placed in service during 2011; this “bonus” first-year
additional depreciation deduction will drop to 50% for property acquired and
placed in service during 2012. For 2011, the maximum amount that can be expensed
under IRC Section 179 is $500,000, but in 2012 the limit will drop to
$139,000.
8. Last chance to deduct energy-efficient home improvements
This is the last year you’ll be able to claim a credit for energy-efficient
improvements you make to your home (up to 10% of the cost of qualifying
property). Improvements can include a qualifying roof, windows, skylights,
exterior doors, and insulation materials. Specific credit amounts may also be
available for the purchase of energy-efficient furnaces and hot water boilers.
However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve
claimed the credit in the past–in one or more years since 2005–you’re only
entitled to the difference between the current cap and the amount you’ve claimed
in the past.
Barring additional legislation, this is the last year that you’ll be able to
elect to deduct state and local general sales tax in lieu of state and local
income tax, if you itemize deductions. This also will be the last year for both
the above-the-line deduction for qualified higher education expenses, and the
above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid
by education professionals.
Making effective year-end moves requires a solid understanding of the rules
that are in effect for both 2011 and 2012. It also requires a comprehensive
grasp of your overall financial situation. A financial professional can help you
evaluate potential opportunities, and can keep you apprised of any last-minute
legislative changes.
Teenagers and Roth IRAs
August 11, 2011
Dear CPA
Recently I had a discussion with my husband about putting some funds in an IRA for our 18 year old. We have little extra money this year and thought it might be good to get her going with a retirement savings account. Should we do a Roth or traditonal IRA?
Marie, Eden Prairie
Hello Marie,
Yes, I think you’re on to something. Not only would starting a retirement account for your daughter be a good idea, funding a Roth IRA would be an even better idea.
If you daughter is receiving compensation in the form of wages, she could begin a retirement account and (you can) fund it up to $5,000 depending on her compensation. She must have taxable wages in the year.
A Roth contribution is non-deductible for taxes, but once the funds are in a Roth, the earnings would be tax free once withdrawn. Starting a Roth for a younger person offers tremendous benefits over the years.
Keep in mind that you have until the April filing deadline to fund the Roth.
Call me to help get you started!
888-RAPACKI
Joe
photo credit: alancleaver_2000
Roth IRA
November 30, 2009
Joe,
One of my friends just asked me if I planned on converting my IRA to a Roth IRA. He was excited because of a rule change that now made him eligible. He asked me if I were going to do the same thing. I lied and said I was. To be honest, I don’t even know the difference. Should I convert my IRA? What is the rule change he is talking about?
Walter, Stillwater
Walter,
You are not alone in not knowing the difference between a traditional IRA and a Roth IRA. The basic difference rests when the taxes come out. With a traditional IRA you put money in tax free, but are then taxed when you withdraw. With a Roth IRA, you pay an upfront tax on the investment, but then the money is tax-free to withdraw.
My guess is the change he is talking about is the dropping of the income limit for those who can open or convert a Roth IRA. In the past, only investors with a yearly income under S100,000 could access a Roth IRA. A recent study by Fidelity Investments found that 83% of those surveyed knew nothing about the removal of income limits on IRAs. Understandable given that most investors face other financial issues to worry about. Which is a shame because investor ignorance clouds a significant economic opportunity.
So should you convert your traditional IRA to a Roth IRA? Probably. The most obvious reason is the tax-free income stream. With a Roth IRA, an investor pays the upfront tax, based on his income tax percentage, on the contribution. This strategy works especially well for those who plan on being in a higher income bracket upon retirement than they are now. Not just those starting out, but those who are out of work right now.
But even if you are doing well financially a Roth conversion is advisable. In a one time offer, the government will allow investors to defer the tax hit over two years. If you convert your traditional IRA to a Roth IRA in 2010, you can spread the tax liability evenly over 2011 and 2012. This helps to lessen the shock of a one time large tax hit.
Another reason to convert now is to take advantage of a shrunken portfolio. Yes, there is an upside to the freefall of your IRA. When you convert to a Roth IRA, you are taxed on the amount converted. If your IRA has a value reduction of 30%, that means 30% less in taxes. When the account grows, you will not be taxed on the additional growth.
Finally, a conversion to a Roth IRA provides you more control over your estate planning. There are no mandatory deductions at 70.5, meaning a Roth IRA is preferable if you plan to pass on the account to beneficiaries.
All of these factors contribute to the proverbial perfect storm for you to convert your traditional IRAs to a Roth IRA. Don’t let your ignorance or a lack of press contribute to a missed financial opportunity.
Hope this information helps. Maybe you can even give your friend some advice. As always, check with a money manager whom you trust before making any conversions. There are many subtle rules that impact your conversion. Best of luck, Walter.
photo credit: scottwills
Solo 401K
February 16, 2009
J.K. Lasser’s Your Winning Retirement Plan (J.K. Lasser Guide Series,)
Joe
Last year I started a Solo 401K plan for my small corporation. I deferred $15,000 from my paycheck into the plan. My total salary was $60,000. How much can my company put into the plan on my behalf?
David
St Louis Park, MN
Hello David.
Sounds like you had a good year! Yes to simplify, the 401 Solo Plan consists of two parts; a Salary Deferral portion from your wages, and a Profit Sharing Contribution from your company.
The rule is that in 2008 (for the Salary Deferral Portion ) you were allowed to defer up to $15,500 or 20,500 if you were age 50 or older. The your maximun Salary Deferral could have been up to 100% of your salary up to those limits.
Your company’s Profit Sharing contribution of up to 25% of your salary may be contributed to an Individual 401K. ( therefore 25% of 60,000 would be $15,000 maximum.)
The total combined amount you’re allowed to put into the Solo 401K for the 2008 tax year is $46,000 or $51,000 if age 50 or older.
Joe
Photo Credit: whiteafrican
