End of the Year Tax Tips 2011
Even though the rates, standard deduction and exemptions are marginally better in 2012, I think deferring income & accelerating deductions in 2011 is still a good strategy.
Long Term Cap. Gains (held > 1 year) are taxed at 15% (AND 0% for individuals whose marginal regular tax rate does not exceed 15% reg. income tax. (approx. income $34,000 single / $69,000 joint)
In general, how do we accelerate deductions and defer income into 2012 ?
Here are some suggestions:
1) Prepay before January 1, 2012
· State & local taxes. If you normally pay state and local income taxes or are scheduled to make a 4th QTR install in Jan 2012 – Do it now!
· Contributions – Those contributions you planned for early 2012- Do them now!
Consider Property (non-cash) contributions. You can deduct at FMV and no tax on its appreciation (vs. if you sold the property and paid cash).
Bunch up medical expenses now. Can deduct greater than 7.5% of AGI.
· Home equity mortgage to pay off non-deductible interest (like credit cards).
· Bonuses to you – If possible, move this income to 2012. Ask your employer if possible. This way, the income tax on this will not be required to be paid until April 15, 2013!!
A 16 MONTH DEFERRAL
· Appreciated Capital Gains property – consider not selling until after Jan. if possible. If unrealized loss – consider converting (selling) in 2011.
· Because the capital gain tax rate is lower for individuals in the 15% tax bracket, you may want to consider gifting appreciated stock or other property to them (like kids / grandparents) to convert in their bracket assuming the kids aren’t subject to the kiddie tax (using parents tax rate if their unearned income is greater than 1,900.)
FOR PEOPLE 70-1/2 OR OLDER
CHARITABLE CONTRIBUTIONS FROM IRAs (which is set to expire 12/31/11).
If you have the contribution paid directly from an IRA to the charity – the income is not taxable to you.
· Note: no deduction for charity but this is ok
· And it counts toward your RMD (Requires Minimum Distribution) which is required at 70-1/2
· Installment Sales – taxed as you receive the principal. If you sale in 2011 but agree to receive most of the principal in 2012 or beyond – You have effectively deferred it (Like a Land Contract.
· Increase your retirement deferrals in 401(k) and similar plans
· The acceleration of expenses and deferral of income is still key.
Cash Basis Income – To extent reasonable, defer billing until late Dec.
Accelerate Business expenses
· Year-end bonuses
· Prepay some of your Jan/Feb expenses (Rent, supplies, etc.)
· Bonus Depreciation
· New property only
· 100 % of cost set to reduce in 2012 to 50% and go away after 2012
· Not Subject to limitations like the so called Section 179 (2 MM Property/$500K Deduction)
Retirement & health benefit maximum contributions:
· 401(k) 16,500 (22,000 if 50+)
· IRA 5,000 (6,000 if age 50+)
· SIMPLE IRA (Simplified employee pension plan) 11,000 (14,000 if 501+)
· Self-employed 20% of income up to 49,000
· HSA (Health Savings Account) – Tax deferred contribution
· FSA (Flexible Spending Account) – Redirect pretax income to a employer-sponsored plan for medical
· Mileage (51cents Jan – Jun and 55 cents July – December) or
· Actual Expenses
GIFT / ESTATE TAX –
· Annual Exclusion 13,000 (26,000 if split gifts)
· Lifetime Exemption – 5 million (10 MM for married couple)
FINANCIAL DISTRESS ISSUES (Forgiveness of Debt)
a) Discharge of Debt (1099-C)
b) Discharge and a transfer/ conversion of asset (1099-A)-subject to capital gain/(loss).
Exclusions for the Forgiveness of Debt
· Principal Residence
STATE OF MICHIGAN (Effective 2012)
· Residents born before 1946 – Public Pensions not taxed. Private Pension – $45,120 / $90,240 exemption
· Most other residents – All income liable to tax at 4.35%. When they turn 67, a $20,000 / $40,000 exemption comes into play. There is a phase out.
BUSINESS TAX (CIT)
· 6% income tax based on federal taxable income.
· Doesn’t apply to pass through entities (Subchapter S, LLC)
Several provisions will be expiring this year like Educator Expenses, Deduction for Mortgage insurance premiums, Sales tax as an itemized deduction, Tuition and fees deduction (although credits like HOPE and Lifetime Learning still apply).
Need more information?
Contact Alan C. Young and Associates or (313)-873-7500 ext 0225