Year End Tax Planning For Individuals & Businesses

Year-End Tax Planning For Individuals & Businesses

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there's no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again "patch" the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.   

Tax Strategies for Individuals   

• Maximize amount to your employer's health flexible spending account (FSA) if you set aside too little for this year.


• Realize gains or losses on stock while substantially preserving your investment position, depending on your facts and circumstance.


• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI).


• Accelerate income and defer deductions if you anticipate being in a higher tax bracket next year.


• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value and you will wind up paying a higher tax than is necessary. You can re-characterize the rollover by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer by the extended due date of your tax return.


• It may be advantageous to try to arrange with your employer to defer a bonus until 2012.


• Consider using a credit card to prepay expenses that can generate deductions for this year.


• If you expect to owe state and local income taxes for 2011 and you are not in  Alternative Minimum Tax (AMT) consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end.


• You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions, try to pay all expenses in same year.


• If you are a homeowner and make energy saving improvements to the residence; you may qualify for a tax credit if the assets are installed in your home before 2012.


• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses.


• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.


• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.


•  Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.  

Tax Strategies for Businesses 

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. However, for tax years beginning in 2012, the dollar limit will drop to $139,000 and the beginning-of-phase out amount will drop to $560,000.


• Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if bought and placed in service this year. This will not be available in 2012. Business planning to purchase NEW depreciable property this year or the next should try to accelerate purchasing this year, if doing so makes sound business sense.


• If you are self-employed and haven't done so yet, set up a self-employed retirement plan and maximize contributions.


• If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.


• Consider employing your children in the business