Wednesday, November 9, 2011

2011 Year-End Tax Planning: Tips & Strategies for Indivduals

Courtesy of Guest Blogger Steven Perrotta

2011 Year End Tax Deduction Acceleration Planning, Tips & Strategies:
  • You may want to consider paying tax deductible expenses by December 31, 2011 instead of 2012, including medical bills, charitable cash contributions, real estate taxes and/or make charitable non-cash donations by December 31, 2011.
  • You may want to consider paying your January 2012 monthly mortgage bill by December 31, 2011, to get an additional month of mortgage interest tax deduction on your 2011 tax return.
  • You may want to consider taking advantage of realized losses in 2011 on your stocks/securities while still being invested in the market.  There are several ways this can be done.  For example, you can sell your original holdings by December 31, 2011, and subsequently buy back the same securities at lesat 31 days later to avoid a wash sale transaction.  I would recommend discussing your year-end stock trades with myself as well as your financial advisor before making them.
  • You may want to consider increasing your 401(k) or IRA contributions for 2011.
  • 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, which would reduce your taxable income.
  • You may want to consider using a credit card to prepay expenses that can generate tax deductions for 2011.
  • You may want to consider purchasing big ticket items in 2011, such as a car, in order to assure a deduction for sales taxes on the purchases, if you will elect to claim the state and local general sales tax deduction instead of the state and local income tax deduction.
  • If you are a homeowner, you may want to consider making qualified energy efficient improvements to your residence, such as installing energy saving windows, and energy efficient heaters and/or air conditioners.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction for the year ending December 31, 2011.
  • If you expect to owe state and local income taxes when you file your 2011 tax return, consider asking your employer to increase your W-2 withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to increase the deduction of those taxes in 2011, if it won't create an alternative minimum tax (AMT) problem.
  • Consider prepaying eligible higher education expenses f/y/e December 31, 2011 to obtain extra credit/deduction for 2011.
2011 Alternative Minimum Tax Planning, Tips & Strategies
  • Taxpayers who are affected by the Alternative Minimum Tax "AMT" have additional considerations to think about.  The AMT eliminates and/or reduces the federal tax deductions for medical expenses, state and local taxes, real estate taxes, and miscellaneous itemized deductions.  If you are subject to the AMT we encourage you to pay those expenses when they are due instead of trying to accelerate or defer them to avoid/reduce your chances of being in the AMT.
    • i.e. Instead of prepaying your real estate taxes for 2012 in 2011, wait until the actual due date to pay the real estate taxes since real estate taxes are an adjustment for the AMT calculations.
2011 Income Deferral Planning, Tips & Strategies
  • Consider asking your employer to pay out your 2011 bonus in 2012.
  • Consider holding off on selling stocks/securities and other investments with taxable gains until 2012.
  • Consider holding off on taking taxable distributions from an IRA or other retirement accounts until January 2012, to reduce your taxable income for 2011.
  • Consider making investments that won't generate income until 2012 i.e. purchase investments that mature in the following year.  The income on these investments will be reported in the year the investments mature.
  • Consider when you want to start collecting Social Security benefits.  If you will turn 62 in 2011 or 2012, you are eligible to collect SS benefits at a rate that is less than what you would collect at your full retirement age - Please visit www.ssa.gov for more information on your full retirement age.
Other 2011 Tax Planning, Tips & Strategies for Individuals:
  • You can make a tax free gift in the amount of $13,000 in 2011 to an unlimited number of individuals.
  • You may want to consider converting a traditional IRA invested in stocks or mutual funds, which have significant losses into a Roth IRA if eligible to do so.  This conversion will increase your income for 2011.  If you are in a high tax bracket in 2011 this may not be optimal for you.
2011 Year-End Tax Planning, Tips & Strategies for Businesses & Business Owners
  • If your Business wil be profitable f/y/e December 31, 2011, business owners may want to consider making fixed asset purchases that qualify for the full depreciation deduction under Section 179 of the Internal Revenue Code.
    • For tax years beginning in 2011, the expensing limit is $500,000 and the investment limit is $2,000,000.  A limited amount of expensing may be claimed for qualified real property.  Please note: this depreciation expense deduction under section 179 is not prorated for the time that the asset is placed in service during the year.
  • Business owners should also consider making qualified leasehold improvements that qualify for accelerated depreciation.
  • Business owners should also consider tax credits such as the: Work opportunity tax credit, this is a credit issued for hiring qualified workers (such as unemployed veterans, etc.) before December 31, 2011.
  • Self-employed business owners may want to consider setting up a retirement plan, such as a SEP.
  • Business owners may want to adopt a Defined Benefit Plan or Defined Contribution Plan for additional retirement savings as well as additional tax deductions.
    • Please note some of these retirement plans can be funded up until the date the tax return is filed, which defers cash outflow.
  • If you have an interest in a partnership or an S corporation, you may need to increase your tax basis in your entity, in order to deduct a loss that you may be incurring for 2011.

Above are some 2011-year-end tax planning, tips & strategies that can be implemented for the tax year ending December 31, 2011.  I would be more than happy to go over with you anything listed above, as well as other year-end tax planning tactics that I feel may fit your particular situation.


Tax planning is very important for everyone; don't let Uncle Sam get the best of you!

Steven Perrotta is Tax Manager at Schulman Wolfson & Abruzzo, LLP and can be reached at sperrotta@swallp.com.