To our Clients and Friends,
Tax planning could be very important this year. There are a host of new law changes that may affect your tax liability. We would like to give you a summary of recent law changes and pending issues to consider this year.
Current Year Law Changes:
•Congress recently extended the 50% bonus depreciation deduction on new equipment through 2012, in 2011 the bonus depreciation rate is 100% allowing a 100% deduction for new equipment.
•The §179 deduction is currently at $500,000 for 2011. This allows businesses with taxable income to write-off the cost of fixed assets.
•The long-term capital gain rate is currently at 15% for 2011 and 2012.
•There is no adjusted gross income limitation for ROTH IRA conversions.
•Qualified dividends will still be taxed at the long-term capital gain rate through 2012.
•The estate, gift, and GST exemption amount is $5,000,000 for 2011 and 2012, and adjusted for inflation thereafter.
•The new estate, gift, and GST tax rate is 35% through 2012.
Future Years Law Changes:
•In 2013 the employee portion of the Medicare tax will increase to 2.35% from 1.45% for single tax payers’ wages above $200,000 and married taxpayers’ wages above $250,000.
•In 2013 a new Medicare tax of 3.8% will be imposed on net investment income that is above an individual taxpayer’s Adjusted Gross Income (AGI) of $250,000.
•The employee OASDI (Social Security payroll taxes) tax cut of 2.0% will be reversed beginning in 2012.
•The §179 deduction will be reduced to $125,000 beginning in 2012.
Pending Issues:
The following items will occur unless Congress acts to extend them for or beyond 2011:
•The exemption for Alternative Minimum Tax (AMT) will be reduced in 2012 for all taxpayers. This will cause most taxpayers to be subject to the AMT.
•The top marginal income tax bracket will be 39.6% instead of 35%, and the 10% income tax bracket will be eliminated beginning in 2013
•The long-term capital gains rate will be 20% instead of 15% beginning in 2013.
•This is just a brief summary of some of the items that you should be aware of. Below is also a more detailed list of items that you may want to consider for planning.
We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
•Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
•If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
•Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
•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). These include IRA and Roth IRA contributions, child credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
•Make charitable contributions before year-end. If you have appreciated stock that you’ve held more than a year, and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual funds because there are no transaction fees involved.) However, if the stock is now worth less than you when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy back a like number of shares as this will trigger the wash sale rules, which means your loss won’t be deductible, but instead will be added to the basis in the new shares.
•If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
•It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
•If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
•You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2011 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
•If you are age 70 1/2 or older, own IRAs (or Roth 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. This distribution rule will not be available after December 31, 2011.
•Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2011 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
•Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, electing to deduct investment interest expense against capital gains, and disposing of a passive activity before year-end to allow you to deduct suspended losses.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
•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 using a credit card to prepay expenses that can generate deductions for this year.
•If you expect to owe state and local income taxes when you file your return next year, 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 to pull the deduction of those taxes into 2011 if doing so won't create an AMT problem (see below).
•Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
•Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.
•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.
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