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.
Late 2009 Tax Planning – Equipment Purchases
October 6, 2009
Joe,
Are there some tax rules my small business could take advantage of before the end of 2009?
Brad, Bloomington, MN
Dear Brad,
That’s a good question. There are two favorable items due to expire on December 31, 2009.
- Bonus depreciation. The 50 percent first-year bonus depreciation (for new equipment) is due to expire at the end of 2009. What this means is that 50% the cost of the new asset may be depreciated in addition to using the standard depreciation tables. Also, the $8,000 additional first-year depreciation allowed for new vehicles placed in service ends in 2009. For bonus depreciation to apply, the equipment must be placed in service by the end of 2009.
- Code Section 179 expensing. Although this does not affect many clients, the limit for Code Section 179 expensing drops from $250,000 in 2009 to a maximum of $125,000 in 2010.
The rules are somewhat complex and you should review the specifics with your tax professional.
For more information, visit: http://www.irs.gov/businesses/small/article/0,,id=213666,00.html
Joe
