• Deferring income into 2012 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, generally because of much-reduced income or much-increased deductible expenses. You many consider deferring the sale of investments, receiving bonuses or exercising stock options.
• It may pay to accelerate income into 2011 if you think your marginal tax rate will be much lower this year than it will be next year.
It may be beneficial to accelerate paying deductions such as paying your 4thquarter state estimated tax installment in December instead of at the January due date. Pay your entire property tax bill, including installments due in year 2012, by year-end. Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
This is also known as Section 179 Expensing.
Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that starting in tax year 2010 and continuing into tax year 2011, the maximum Section 179 expense deduction for equipment purchases increased to $500,000 and the bonus depreciation increased to 100% for qualified property. Beginning in tax year 2012 however, the Section 179 deduction is scheduled to drop to $125,000 and the bonus depreciation to be reduced to 50 percent and then be phased out completely.
In other words, in 2011 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to $500,000 (subject to a dollar-for-dollar reduction in that $500,000 for property placed in service that exceeds the maximum amount of $2,000,000).
If you haven’t taken advantage of energy tax credits for your home, 2011 is your last chance. The credits–10% of cost up to $500 or a specific amount from $50 – $300–expire on December 31, 2011 and only apply to improvements in an existing home that is your principal residence. New construction and rentals do not qualify.
The tax credits are as follows:
Caution: Taxpayer is ineligible for this tax credit if this credit has already been claimed by the taxpayer in an amount of $500 in any previous year.
Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2011 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Check Your Withholdings
With less than two months remaining in the calendar year, it’s a great time to double check your federal withholding to make sure enough taxes are being taken out of your pay.
Certain folks should pay particular attention to their withholding. These include:
Failure to adjust withholding could result in potentially smaller refunds or, in limited instances, a taxpayer may owe tax rather than receive a refund next year.
The value of each personal and dependent exemption will increase $100 to $3,800 in 2012.
The new standard deduction is $11,900 in 2012 for married couples filing jointly. Individuals and married people filing separately will see the standard deduction rise to $5,950 and the standard deduction for head of household rises to $8,700. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions.
Annual gift tax exclusion remains at $13,000 in 2012. The basic exclusion from estate tax amount increases to $5,120,000, from $5,000,000 in 2011
You can donate property as well as money to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses however.
Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains, which in 2011 and 2012 are taxed at rates of zero and 15 percent depending on your tax bracket. Consider where feasible to reduce all capital gains and generate short-term capital losses up to $3,000 as well.
Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.
Note: The maximum long term capital gains tax rate is currently 15 percent and will expire on December 31, 2012 when it’s set to rise to a maximum of 20 percent. Also of note is that starting in 2013, a 3.8 percent medicare tax may also be applied to long term capital gains. This information is something to think about as you plan your long term investments.
For many, sound estate planning begins with lifetime gifts to family members. in other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $13,000 a year per donee. You must make your gift by December 31.
Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $26,000 ($13,000 each). Though what’s given may come from either you or your spouse or from both of you, both of you must consent to such “split gifts”.
Gift tax returns for 2011 are due the same date as your income tax return. Returns are required for gifts over $13,000 (including husband-wife split gifts totaling more than $13,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $13,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed”.
Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. (It doesn’t need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.)
If you are an employee and your employer has a 401(k), contribute the maximum amount ($16,500 for 2011 and $17,000 for 2012, plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don’t apply).
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.
