YEAR-END TAX PLANNING THROUGH THE HAZE

By Steve Barlotta, CPA

As mentioned in last week’s blog, the collapse of Congress’ deficit-cutting committee has caused major uncertainties among taxpayers on how to plan for the end of 2011, and going forward, 2012 and 2013. While things may seem murky right now, there are some plans that you can implement before year-end and some you should consider for 2012 and 2013. Here are a few of our tax planning ideas, as well as some important information you should be aware of.

Itemized Deductions/Expenses

Consider paying tax-deductible expenditures like charitable contributions with your credit card. If the transaction occurs in December your deduction is allowable, even if you pay the credit card bill in the following year.

If you need additional itemized deductions in 2011, consider making your fourth quarter state estimated tax payment and your 2012 first quarter property tax payment before year end. However, it is important to find out if these additional deductions will trigger the Alternative Minimum Tax (AMT).

Charitable Contributions

Make charitable contributions from your IRA. The provision for making charitable contributions from an IRA is set to expire on December 31, 2011. If you’re 70 1/2 or older you can instruct your IRA custodian to make a contribution directly to a charitable organization. Somethings to keep in mind: you receive no deduction for the contribution, the distribution will not be included in your taxable income, you are limited to $100,000 in contributions, and the charitable contribution will count towards your required minimum distribution.

Consider contributing appreciated assets in lieu of cash. You can avoid paying capital gains taxes on its appreciation and can deduct the long-term asset at its fair market value on the date of the contribution.

Tax Credits

2011 is the last year that the Residential Energy Tax Credit is available. The credit is for energy efficient improvements like water heaters, furnaces, boilers, heating and air conditioning systems, insulation, and exterior windows. The energy efficient tax credit for 2011 is a 10% credit and is limited to a lifetime maximum of $500. You will not eligible for this credit if it has been already claimed in an amount of $500 or more in any previous year. So, it’s important to review your prior years’ tax returns to see if this credit has been taken.

Roth IRAs

Now that there are no longer any income limitations on high income individuals, every taxpayer with a Traditional IRA can convert to a Roth IRA. The main advantage of the Roth IRA is that there is no tax when the money is withdrawn; assuming certain conditions are met. The conversion will result in taxable income in the current year. However, the tax consequences of the conversion can be minimized if you expect a business loss, capital loss or have higher itemized deductions in 2011.

Estate and Gift Tax Planning

The estate and gift tax exemption amount for 2011 is $5 million. The total effectively doubles to $10 million for married couples under the “portability” rule where the first spouse to die can elect to transfer any unused estate tax exclusion to the surviving spouse. The unified exemption amounts are scheduled to be indexed for inflation in 2012, to $5.12 million. However, there has been some chatter in Washington that Congress might reduce the 2012 exemptions as it looks for ways to tackle the federal deficit. In 2013, the exemption amounts are scheduled to be reduced to only $1 million, and spousal portability would be disallowed as well. If you want to move money out of your estate, now might be the best  time to formulate a plan to take advantage of the $5/$10 million lifetime exclusion.

The annual gift tax exclusion for 2011 remains at $13,000 per person. Married couples can take advantage of the gift-splitting rules and gift up to $26,000 per donee without cutting into the $5 million lifetime exclusion. Gifting reduces your taxable estate. So, utilizing this gifting strategy should be an important part of your ongoing estate plan.

Looking Ahead to 2013

Some future tax changes are scheduled to take effect in 2013.

Starting in 2013, there is a new Medicare Hospital Insurance tax (HI) that will affect higher income taxpayers. There will be a .9 percent tax on earned income in excess of $250,000 for joint tax returns and $200,000 for single filers.

A 3.8 percent tax will also apply to net investment income to the same individuals and in the same manner as referred to above. Net investment income, generally, would be items like interest, dividends, royalties, rents, capital gains, and businesses that are considered a passive activity.

The threshold for the itemized deduction for unreimbursed medical expenses will be increased to 10 percent of adjusted gross income. It may be a good idea to plan for any unreimbursed medical procedures in 2012 in order to ensure that you maximize your deduction. However, if an individual or spouse is 65 or older, the 7.5  percent of adjusted gross income threshold stays in effect through 2016.

Up In The Air

As of the date of this article, there remains some major issues that are still unresolved. Some of the miscellaneous tax items expiring are the deduction for teachers and the “patch” on the Alternative Minimum Tax. In the past Congress has extended, or retroactively extended, these items. So, I would be surprised if they aren’t renewed either by the end of the year, or early 2012.

Also, the debate in Washington continues over extending and expanding the Social Security payroll tax cut that expires on December 31. There appears to be no end in sight as the Democrats want to pay for it in part by imposing a 1.9 percent surtax on annual income exceeding $1 million, which Republicans objected to and offered their own funding proposal.

Finally, on more than one occasion, President Obama has proposed letting the Bush tax cuts expire at the end of 2012 for couples earning more than $250,000 and individuals making at least $200,000. If this occurs it will become important for these taxpayers to plan ahead and bunch their income in 2012 and defer deductions into 2013. As I previously mentioned, when you increase your deductions in a particular year it is important to ascertain if the acceleration will trigger the Alternative Minimum Tax.

These are some of the topics I consider important. I realize that I probably did not address every issue that relates to your specific situation. If you have any questions or comments, feel free to contact me and I would be more than happy to talk to you.

The technical information in this article is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.