Loading ...Here is an update for 2011 year-end planning, but remember to also do 2012 planning as you gather and review your 2011 information!
2011 year-end tax planning
The goal for tax planning, as always, is to minimize the total that you pay for 2011 and 2012
Most taxpayers will save by accelerating write-offs from 2012 into 2011 and deferring income to 2012. If you’ll be in a higher bracket in 2012, consider the opposite…accelerating income and delaying your deductions.
Itemizers have the greatest flexibility: State and local income taxes.
Mailing your Jan. 2012 estimate in late Dec. lets you claim the deduction this year.
Donations. You can accelerate contributions planned for 2012 into 2011,
but you must charge them or mail the checks by Dec. 31 to ensure a 2011 write-off. And consider making your donations using appreciated stock that you have owned for over a year. You deduct the full value and don’t pay any tax on the appreciation.
Interest. Making the Jan. 2012 mortgage payment on your residence before the end of this year enables you to deduct the interest portion in 2011.
Medicals. If you’ve exceeded the 7.5%-of-adjusted-gross-income threshold or are close to it, consider getting and paying for elective procedures this year.
Some taxpapers can hop in and out of the standard deduction from year to year.
If your 2011 itemizations fall shy of the standard deduction amount, try delaying some and itemizing in 2012. But if their total just exceeds the standard deduction amount for this year, try to accelerate some itemizations and take the standard deduction in 2012. This year’s standard deduction for couples is $11,600, plus $1,150 more for those 65 and older. Singles get $5,800…$7,250 if 65 and up. Heads of households get $8,500 plus $1,450 if they are 65. Next year’s base amounts will be $300 higher for married couples, $200 larger for heads of households and $150 more for singles.
If you owe the alternative minimum tax, you may have to revise your strategy.
Paying your Jan. 2012 state tax estimate in 2011 won’t work. And interest on home equity loans is not deductible for the AMT unless you use the proceeds to buy, build or renovate your main home. If you exercise an incentive stock option in 2011, the discount you get is hit by the tax unless you sell the shares by Dec. 31. And you won’t benefit from a 2011 payment of a real estate tax bill due in early 2012. Taking certain types of deductions makes you more likely to owe the AMT.
Many write-offs must be added back when you calculate AMT liability: Sales taxes, state income taxes, property taxes, some medicals and most miscellaneous write-offs.
Large gains can also trigger the tax if they cost you some of your AMT exemption.
We have a calculator you can use to check whether the AMT will hit you.
Prior posts:
Tax planning: 2010 tips and traps, and 2011 changes
For 2010, some old provisions return and some new changes require action now:
• 2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see http://www.sab-esq.com/financial-strategies-newsletter/bid/13406/To-convert-or-not-traditional-IRA-to-Roth-IRA).
• Certain advantages in 2009 are lost for 2010 (see http://www.sab-esq.com/financial-strategies-newsletter/bid/27670/What-to-watch-out-for-in-2011-investing-taxes-and-more)
• AMT patch falls back;
• Casualty and theft loss limits fall back;
• Educator and tuition and fees deductions against adjusted gross income are not available;
• Deduction of state and local sales taxes ends;
• Exclusion of $2,400 of unemployment income ends; and
• Exclusion of income from qualified distributions from IRAs to charities ends.
However, some still apply in 2010:
• New home buyer credit (through the extended date)
• Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
• A tax refund can be used to buy U.S. Series I bonds.
• Note that a dependent child’s income is taxed when it exceeds $1,900.
• Educator’s Expense
Note that not all states accept the IRS changes, so the information and outcome could be different.
As we said before, tax planning involves a multi-year view to optimize what you end up paying (please see http://www.sab-esq.com/financial-strategies-newsletter/bid/19562/More-Tax-Strategies-Three-Year-Planning-for-this-year-end, http://www.sab-esq.com/financial-strategies-newsletter/bid/21591/Year-end-Tax-Planning-Tax-Credits-and-all-Continued, and http://www.sab-esq.com/financial-strategies-newsletter/bid/27670/What-to-watch-out-for-in-2011-investing-taxes-and-more)