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Year-End Tax Planning Considerations
Legislation passed in December of 2010 extended lower tax rates, deductions and other expiring provisions for an additional one to two years. As a result you can consider many (but not all) 2011 year-end tax planning moves with a relative degree of certainty. Here are a few things to keep in mind.
Expiring provisions:
Barring additional legislation, 2011 will be the last opportunity to take advantage of some expiring provisions:
- "Bonus" depreciation limits drop significantly in 2012. Businesses are allowed a first-year depreciation deduction of 100% of the cost of qualifying new property acquired and placed in service during 2011; this "bonus" depreciation deduction will drop to 50% for 2012 and 0% thereafter.
- For 2011, the maximum amount of qualifying property (business machinery, equipment, furniture and up to $250,000 of certain real property additions) that can be expensed under IRS Section 179 is $500,000, but in 2012 the limit will drop to $139,000. As usual there are both caps and phase-outs for the Section 179 expensing options. Certain real property additions, leasehold, retail and restaurant improvements that are currently treated as qualified Section 179 property will no longer be treated as such in 2012, and will therefore be subject to a much slower write off.
- The 100% exclusion for capital gain from the sale or exchange of qualified small business stock (certain requirements, including a five-year holding period, apply) will not apply to qualified small business stock issued and acquired after 2011.
- The "above the line" deductions for up to $250 of out-of-pocket classroom expenses paid by education professionals and up to $4,000 of qualified higher education expenses expire at the end of 2011.
- This is the last year you will be able to claim a credit for energy-efficient improvements made to your main home (up to 10% of the cost of qualifying property). Improvements 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 is a lifetime credit cap of $500 ($200 for windows).
Individual tax rates unchanged for 2012:
The same six federal individual income tax rates that applied for 2011 will apply for 2012. So, depending on your taxable income, you will fall into either the 10%, 15%, 25%, 28%, 33% or 35% federal tax rate bracket. The rates that apply to long-term capital gains and qualified dividends also remain unchanged and continue to be taxed at a maximum rate of 15% in 2011 and 2012. If you are in the 10% or 15% federal tax bracket, a special 0% capital gains tax rate will generally apply. Absent further action by Congress, these "reduced" tax rates will expire on December 31, 2012 and the rates will return to the pre-Bush tax cut rates that existed in 2001.
AMT "fix" expires at end of year:
If you are 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.
For the last several years, Congress has "fixed" (increased) the AMT exemption amount at the last minute. The current AMT exemption for 2011 of $74,450 (for those who are married, filing jointly) is scheduled to decrease back down to $45,000 in 2012, subjecting many more taxpayers to the AMT. Although many expect Congress to once again increase the exemption, your year-end planning should take this tax into consideration.
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AMT exemption amounts |
2011 |
2012 | |
Married filing jointly |
$74,450 |
$45,000 | |
Single or head of household |
$48,450 |
$33,750 | |
Married filing separately |
$37,225 |
$22,500 |
Retirement plan contributions:
Traditional IRAs (assuming you qualify to make deductible contributions) and employer-sponsored retirement plans, such as 401(k) plans, allow you to contribute funds pretax, reducing your taxable income. Contributions you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars. However, qualified Roth distributions are completely free from federal and Virginia income tax, making these retirement savings vehicles very appealing.
For 2011, you can contribute up to $16,500 to a 401(k) plan ($22,000 if you are age 50 or older) and up to $5,000 to a traditional or Roth IRA ($6,000 if you are age 50 or older). The window to make 2011 contributions to an employer's plan closes at the end of the year. You generally have until April 15, 2012 to make 2011 IRA contributions and the extended due date of the tax return to make self-employed retirement plan contributions.
Retirement plan distributions:
 Once you reach age 70½, you must start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plan accounts you own. Remember to take any required distributions by the end of the year. The penalty is steep for failing to do so: 50% of the amount that should have been distributed.
The year 2011 may be the last opportunity for 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 be required to take from your IRA for 2011.
Health savings accounts:
Individuals who are covered by high deductible health insurance plans are allowed to establish health savings accounts (HSA) to receive tax deductible contributions. HSA contributions may be accumulated over the years and currently, or in the future, distributed tax free to pay for qualified medical expenses. HSA's are a great way to save taxes by paying for medical expenses with pre-tax dollars. If you do not have an HSA, please call us to discuss this money saving account.
Donating appreciated stock:
If you are planning to make a relatively substantial contribution to a charity, college, etc., you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock. When donated property has appreciated in value from the original cost, the donor does not have to recognize the gain on the donated property. These rules allow for the "doubling up," so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.
Please note that if the stock has been held for less than a year it is treated as "ordinary income property" and the charitable deduction will limited to the stock's cost. For stock donations, the charitable deduction you may take in any year is limited to 30% of your adjusted gross income, with the ability to carry over the excess to the following 5 years.
Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns.
Year-end income and expenses:
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 are able to push what would have been 2011 income into 2012, you will be able to put off paying income tax on the deferred dollars until next year.
Paying deductible expenses sooner may help you in 2011. Does it make sense for you to accelerate deductions into 2011? If you itemize deductions (and are not subject to AMT - see above), 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. Remember, deductible expenses charged to a credit card are deductible in the year charged.
Virginia Neighborhood Assistance Credit for Certain Charitable Contributions:
Each year, Virginia designates certain charities to which donations qualify for a state tax credit of up to 40% of the contribution. Business contributions may be in the form of cash, goods, stock, real estate, professional services, contracting services and rent or lease of the participating nonprofit's facilities and must be at least $1,000 in value. Individual contributions are limited to cash or marketable securities and must be at least $500 in value. A Tax Credit Certificate must be obtained from the organization. The list of approved organizations for the fiscal year July 1, 2011 to June 30 2012 is available at http://www.dss.virginia.gov/community/nap.cgi.
Special Note:
Be wary of any emails that claim to be from the Internal Revenue Service (IRS). The IRS never communicates with taxpayers by email.
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As always, year-end tax planning does not occur in a vacuum. It must take into account each taxpayer's particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. Please feel free to contact one of us to assist you in your year-end tax planning.
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