By taking a look at your (or your clients’) tax situation now, you might be able to reduce the bite Uncle Sam takes out of your hard-earned savings. Below is a handy checklist:
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- Federal income tax rates will remain constant from 2011 to 2012. Therefore, taxpayers should decide whether to defer or accelerate income at the end of 2011 based on expected income and the best use of deductions between the two years.
- Accelerate or defer deductible expenditures to maximize use of deductions.
- Bunch medical expenses into the year they’ll exceed 7.5 percent of adjusted gross income (AGI).
- Consider whether to pay fourth-quarter state estimated tax payments before the end of the year to obtain Federal tax benefit.
Alternative Minimum Tax
- AMT warning signs include large deductions for state income and property taxes, large miscellaneous itemized deductions, and sizable capital gains.
- The AMT exemption amounts have been increased through 2011 (reducing the number of people affected by AMT). The exemption amount is scheduled to revert to pre-2001 levels in 2012, making it important to plan for AMT!
Capital Gain and Capital Loss Planning
- The 15 percent Federal long-term capital gains rate has been extended through 2012. Consider tax loss harvesting strategies before year-end to offset current year gains or to accumulate losses to offset future gains that would be taxed at a higher rate.
- If an installment sale is contemplated, consider electing out of installment sale treatment. Although this might accelerate tax, it will enable taking advantage of today’s historically low 15 percent capital gains tax rate.
Cancellation of Indebtedness
- New rules have eliminated the taxability of income from cancellation of indebtedness in certain circumstances related to home mortgages. A qualified tax advisor should be consulted before agreeing to any loan modifications.
College Education Tax Incentives
- The American Opportunity Tax Credit was extended to 2012. The credit, available for the first four years of education, has more liberal income limitations and provides for a portion of the credit to be refundable.
- Section 529 accounts can be used to accumulate funds for college-related expenses. Appreciation of the investments within the account is tax-free for qualified distributions. If college funds are currently held in taxable accounts, it may make sense to shift these funds to a Section 529 account to reduce future taxable income.
- For 2011 only, the Nonbusiness Energy Property Credit of up to 30 percent of the cost incurred is available for qualifying property, including windows, exterior doors, insulation, fans, furnaces, and water heaters.
- Until 2016, the Residential Energy Efficient Property Credit is available for the installation of certain energy-efficient property, such as photovoltaic panels or solar water heaters.
I acknowledge Moss Adams LLP for providing much of the content in this article from its Year-End Tax Planning Guide: 2011. (http://www.mossadams.com/mossadams/media/Documents/Publications/Wealth%20Services/WSG111005-Year-End-Tax-Planning-Guide-2011.pdf)
Any tax advice contained in this article, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law of (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.