8 Year End Tax Tips
 | |  | |  | |  | |  | |  | |  |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
We've also put together some of our own organizers to help you plan for your tax return:
Here are some steps you can take before the end of the year to lower your 2011
tax bill. Act before December 31 to increase your tax breaks
Whether you are having a good year, rebounding from recent losses, or still struggling to
get off the ground, you may be able to save a bundle on your taxes if you make the right
moves before the end of the year.
1. Defer your income
Income is taxed in the year it is received – but why pay tax today if you can pay it tomorrow
instead?
It's tough for employees to postpone wage and salary income, but you may be able to
defer a year-end bonus into next year – as long as it is standard practice in your company
to pay year-end bonuses the following year.
If you are self-employed or do freelance or consulting work, you have more leeway.
Delaying billings until late December, for example, can ensure that you won't receive
payment until the next year.
Whether you are employed or self-employed, you can also defer income by taking capital
gains in 2012 instead of in 2011.
Of course, it only makes sense to defer income if you think you will be in the same or a
lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if
additional income could push you into a higher tax bracket. If that's likely, you may want to
accelerate income into 2011 so you can pay tax on it in a lower bracket sooner, rather than
in a higher bracket later.
2. Take some last-minute deductions
Just as you may want to defer income into next year, you may want to lower your tax bill by
accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the
timing. You can supercharge the tax benefits of your generosity by donating appreciated
stock or property rather than cash. Better yet, as long as you've owned the asset for more
than one year, you get a double tax benefit from the donation: You can deduct the property’
s market value on the date of the gift and you avoid paying capital gains tax on the built-up
appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old
rule that you only had to have a receipt to back up contributions of $250 or more is long
gone.)
Other expenses you can accelerate include an estimated state income tax bill due January
15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up
deductions could be a blunder if you're subject to the alternative minimum tax, as
discussed below.)
Make sure you'll be itemizing for 2011 rather than claiming the standard deduction. Unless
the total of your qualifying expenses exceeds $5,800 if you are single, or $11,600 if you're
married filing a joint return, itemizing would be a mistake.
If you're on the itemize-or-not borderline, your year-end strategy should focus on
bunching. This is the practice of timing expenses to produce lean and fat years. In one
year, you cram in as many deductible expenses as possible, using the tactics outlined
above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard
deduction amount because you get credit for the full standard deduction regardless of how
much you actually spend. In the lean years, year-end planning stresses pushing as many
deductible expenses as possible into the following year when they'll have more value.
3. Beware of the Alternative Minimum Tax
Sometimes accelerating deductions can cost you money… if you're already in the
alternative minimum tax (AMT) or if you inadvertently trigger it.
Originally designed to make sure wealthy people could not use legal deductions to drive
down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You
have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular
rules—and therefore candidates for accelerated payments—are not deductible under the
AMT. State and local income taxes and property taxes, for example, are not deductible
under the AMT. So, if you expect to be subject to the AMT in 2011, don’t pay the
installments that are due in January 2012 in December 2011.
4. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and
mutual funds to realize losses. You can then use those losses to offset any taxable gains
you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to
wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You
can use it then to offset any 2012 gains, plus up to $3,000 of other income. You can carry
over losses year after year for as long as you live.
5. Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow
to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match
contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of
money allowed ($16,500 for 2011, $22,000 if you are age 50 or over). If you can’t afford
that much, try to contribute at least the amount that will be matched by employer
contributions.
Also consider contributing to an IRA. You have until April 17, 2012 to make IRA
contributions for 2011, but the sooner you get your money into the account, the sooner it
has the potential to start to grow tax-deferred. Making deductible contributions also
reduces your taxable income for the year. You can contribute a maximum of $5,000 to an
IRA for 2011, plus an extra $1,000 if you are 50 or older. Use our IRA Calculator to see
how much you can contribute.
If you are self-employed, the retirement plan of choice is a Keogh plan. These plans must
be established by December 31 but contributions may still be made until the tax filing
deadline (including extensions) for your 2011 return. The amount you can contribute
depends on the type of Keogh plan you choose.
6. Avoid the kiddie tax
Congress created the "kiddie tax" rules to prevent families from shifting the tax bill on
investment income from Mom and Dad's high tax bracket to junior's low bracket. For 2011,
the kiddie tax taxes a child's investment income above $1,900 at the parents' rate and
applies until a child turns 19. If the child is a full-time student who provides less than half of
his or her support, the tax applies until the year the child turns age 24.
So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is
too large and the child’s unearned income exceeds $1,900, you’ll end up paying tax at 15
percent on the gain, rather than the zero percent rate that is applicable for most children.
7. Check IRA distributions
You must start making regular minimum distributions from your traditional IRA by the April 1
following the year in which you reach age 70 ½. Failing to take out enough triggers one of
the most draconian of all IRS penalties: A 50 percent excise tax on the amount you should
have withdrawn based on your age, your life expectancy, and the amount in the account at
the beginning of the year. After that, annual withdrawals must be made by December 31 to
avoid the penalty.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the
payment. Withholding is voluntary, and you set the amount, but opting for withholding lets
you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never
required to withdraw money from the accounts. The required minimum distributions apply to
traditional IRAs.
8. Watch your flexible spending accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many
companies offer that let employees steer part of their pay into a special account which can
then be tapped to pay child care or medical bills.
The advantage is that money that goes into the account avoids both income and Social
Security taxes. The catch is the notorious "use it or lose it" rule. You have to decide at the
beginning of the year how much to contribute to the plan and, if you don't use it all by the
end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted a grace period
permitted by the IRS, allowing employees to spend 2011 set-aside money as late as March
15, 2012. If not, you can do what employees have always done and make a last-minute trip
to the drug store, dentist or optometrist to use up the funds in your account.
- Self Employed Tax Planner (click here)
- Itemized Deductions Tax Planner (click here)
Here are some steps you can take before the end of the year to lower your 2011
tax bill. Act before December 31 to increase your tax breaks
Whether you are having a good year, rebounding from recent losses, or still struggling to
get off the ground, you may be able to save a bundle on your taxes if you make the right
moves before the end of the year.
1. Defer your income
Income is taxed in the year it is received – but why pay tax today if you can pay it tomorrow
instead?
It's tough for employees to postpone wage and salary income, but you may be able to
defer a year-end bonus into next year – as long as it is standard practice in your company
to pay year-end bonuses the following year.
If you are self-employed or do freelance or consulting work, you have more leeway.
Delaying billings until late December, for example, can ensure that you won't receive
payment until the next year.
Whether you are employed or self-employed, you can also defer income by taking capital
gains in 2012 instead of in 2011.
Of course, it only makes sense to defer income if you think you will be in the same or a
lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if
additional income could push you into a higher tax bracket. If that's likely, you may want to
accelerate income into 2011 so you can pay tax on it in a lower bracket sooner, rather than
in a higher bracket later.
2. Take some last-minute deductions
Just as you may want to defer income into next year, you may want to lower your tax bill by
accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the
timing. You can supercharge the tax benefits of your generosity by donating appreciated
stock or property rather than cash. Better yet, as long as you've owned the asset for more
than one year, you get a double tax benefit from the donation: You can deduct the property’
s market value on the date of the gift and you avoid paying capital gains tax on the built-up
appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old
rule that you only had to have a receipt to back up contributions of $250 or more is long
gone.)
Other expenses you can accelerate include an estimated state income tax bill due January
15, a property tax bill due early next year, or a doctor’s or hospital bill. (But speeding up
deductions could be a blunder if you're subject to the alternative minimum tax, as
discussed below.)
Make sure you'll be itemizing for 2011 rather than claiming the standard deduction. Unless
the total of your qualifying expenses exceeds $5,800 if you are single, or $11,600 if you're
married filing a joint return, itemizing would be a mistake.
If you're on the itemize-or-not borderline, your year-end strategy should focus on
bunching. This is the practice of timing expenses to produce lean and fat years. In one
year, you cram in as many deductible expenses as possible, using the tactics outlined
above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard
deduction amount because you get credit for the full standard deduction regardless of how
much you actually spend. In the lean years, year-end planning stresses pushing as many
deductible expenses as possible into the following year when they'll have more value.
3. Beware of the Alternative Minimum Tax
Sometimes accelerating deductions can cost you money… if you're already in the
alternative minimum tax (AMT) or if you inadvertently trigger it.
Originally designed to make sure wealthy people could not use legal deductions to drive
down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You
have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular
rules—and therefore candidates for accelerated payments—are not deductible under the
AMT. State and local income taxes and property taxes, for example, are not deductible
under the AMT. So, if you expect to be subject to the AMT in 2011, don’t pay the
installments that are due in January 2012 in December 2011.
4. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” --selling investments such as stocks and
mutual funds to realize losses. You can then use those losses to offset any taxable gains
you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to
wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You
can use it then to offset any 2012 gains, plus up to $3,000 of other income. You can carry
over losses year after year for as long as you live.
5. Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow
to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match
contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of
money allowed ($16,500 for 2011, $22,000 if you are age 50 or over). If you can’t afford
that much, try to contribute at least the amount that will be matched by employer
contributions.
Also consider contributing to an IRA. You have until April 17, 2012 to make IRA
contributions for 2011, but the sooner you get your money into the account, the sooner it
has the potential to start to grow tax-deferred. Making deductible contributions also
reduces your taxable income for the year. You can contribute a maximum of $5,000 to an
IRA for 2011, plus an extra $1,000 if you are 50 or older. Use our IRA Calculator to see
how much you can contribute.
If you are self-employed, the retirement plan of choice is a Keogh plan. These plans must
be established by December 31 but contributions may still be made until the tax filing
deadline (including extensions) for your 2011 return. The amount you can contribute
depends on the type of Keogh plan you choose.
6. Avoid the kiddie tax
Congress created the "kiddie tax" rules to prevent families from shifting the tax bill on
investment income from Mom and Dad's high tax bracket to junior's low bracket. For 2011,
the kiddie tax taxes a child's investment income above $1,900 at the parents' rate and
applies until a child turns 19. If the child is a full-time student who provides less than half of
his or her support, the tax applies until the year the child turns age 24.
So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is
too large and the child’s unearned income exceeds $1,900, you’ll end up paying tax at 15
percent on the gain, rather than the zero percent rate that is applicable for most children.
7. Check IRA distributions
You must start making regular minimum distributions from your traditional IRA by the April 1
following the year in which you reach age 70 ½. Failing to take out enough triggers one of
the most draconian of all IRS penalties: A 50 percent excise tax on the amount you should
have withdrawn based on your age, your life expectancy, and the amount in the account at
the beginning of the year. After that, annual withdrawals must be made by December 31 to
avoid the penalty.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the
payment. Withholding is voluntary, and you set the amount, but opting for withholding lets
you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never
required to withdraw money from the accounts. The required minimum distributions apply to
traditional IRAs.
8. Watch your flexible spending accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many
companies offer that let employees steer part of their pay into a special account which can
then be tapped to pay child care or medical bills.
The advantage is that money that goes into the account avoids both income and Social
Security taxes. The catch is the notorious "use it or lose it" rule. You have to decide at the
beginning of the year how much to contribute to the plan and, if you don't use it all by the
end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted a grace period
permitted by the IRS, allowing employees to spend 2011 set-aside money as late as March
15, 2012. If not, you can do what employees have always done and make a last-minute trip
to the drug store, dentist or optometrist to use up the funds in your account.
 |  |  |  |  |  |  |  |
