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Dear Clients & Friends:
As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2011 return and in future years. To get you started, we’ve included a few money-saving ideas here that you may want to put in action before the end of the year. Contact us if you have questions about which ideas may be appropriate for you or if you want to discuss other tax-saving strategies.
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For 2011, the standard deduction is $11,600 for married taxpayers filing joint returns and $5,800 for single taxpayers. These amounts will likely be about the same for 2012. If your total itemized deductions are normally close to theseamounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. For instance, you might consider moving charitable donations you normally would make in early 2012 to the end of 2011. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2012. But, watch out for the Alternative Minimum Tax (AMT), as these taxes are not deductible for AMT purposes.
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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. However, if the stock is now worth less than 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.
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If you have taxable investment accounts, take a look at your unrealized gains and losses. The 0% capital gains rate is still in effect for those taxpayers in the 15% tax bracket. You may be able to harvest those gains and re-establish a higher cost basis at no tax cost. Also look at harvesting capital losses to offset gains or other taxable income. If you have questions please schedule an appointment to analyze your holdings and make a plan for the best tax result.
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If you’re age 70½, or older, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to a charity. These Qualified Charitable Distributions, or QCDs, are federal-income-tax-free to you, but you don’t get to claim a charitable deduction on your Form 1040. However, the tax-free treatment equates to a 100% write-off, and you don’t have to itemize your deductions to get it. Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.
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If you are 70 ½ or older also remember to take your RMD (Required Minimum Distribution) by December 31st. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after reaching age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There’s good news for 2011 though – QCDs discussed above do count as payouts for purposes of the required distribution rules. This means you can donate all or part of your 2011 required distribution amount and convert taxable required distributions into tax-free QCDs. See additional QCD rules above.
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If you have a 401(k) or SIMPLE IRA plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.
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Consider converting traditional IRA or pension funds to a Roth IRA. The $100,000 income limit that prevented many taxpayers from converting to a Roth is not in effect in 2011, which means even high-income taxpayers can convert all or a portion of their retirement accounts this year. The amount converted would be taxable income in 2011, but withdrawals of Roth funds are tax-free provided certain requirements are met. A Roth conversion is especially attractive for those taxpayers who are experiencing a low income year. The conversion allows them to convert to a Roth at a very low tax cost currently, while allowing for tax-free withdrawals down the road. Another great aspect of Roth conversions is the “re-do” provision. You have until the extended tax filing due date to determine whether you want to keep the conversion or to reverse the conversion. Why would you “re-do” a conversion? Suppose you converted $30,000 by 12/31/11. The $30,000 conversion amount would be taxable income on your 2011 tax return. You have until 10/15/12 to decide if you want to be taxed on this $30,000. Suppose at 10/15/12 the value of those converted funds had fallen to $20,000. In this instance, you would not want to pay tax on $30,000 of converted funds that is now worth only $20,000 so you would recharacterize, or “un-do,” the conversion and report $0 of taxable income related to the conversion on your 2011 tax return. On the other hand, if the funds had grown to $40,000 by 10/15/12 you would likely keep the conversion and pay the tax related to the $30,000 conversion because you have already gained $10,000 of tax-free income (likely making up a large portion, if not all, of the tax you paid on the $30,000 conversion). The benefit of hindsight with the “re-do” provision makes Roth conversions a very attractive planning tool. Please give us a call if you have questions on this strategy.
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If it looks like you are going to owe income taxes for 2011, consider bumping up the Federal income taxes withheld from your paychecks now through the end of theyear. When you file your return, you will still have to pay any taxes due less the amount paid in. However, penalties will be minimized, if not eliminated.
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Watch out for the AMT in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem.
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Finally, don’t overlook estate planning. For 2011 and 2012, the unified federal gift and estate tax exemption is a relatively generous $5 million per person. The tax rate for 2011 and 2012 is a flat 35%. An even more significant change to the estate laws is that the exemption is now “portable,” meaning any unused exemption amount automatically transfers to the surviving spouse to be used on his/her death. From a practical matter, these provisions now make the use of a bypass trust unnecessary in most cases. The current language in many estate plans might require funding of a bypass trust, which would probably not be ideal in most situations given the new portability rules. So now might be an excellent time to review your wills, trusts, and overall estate plan. In doing so, also keep in mind the exemption will drop back to only $1 million and the tax rate up to 55% in 2013 unless Congress takes action. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. A good estate plan is more than just “do I have a taxable estate or not?” A good estate plan looks at transferring assets and providing for loved ones in the most tax efficient way and in a manner that minimizes family conflict while achieving your desired goals for passing on your legacy.
Client e-Access
We are continuing our push towards a “green,” paperless office. As part of that push we have been exploring ways to reduce paper use. It has been our policy in the past to give all clients a printed copy of their tax returns. Based on conversations with clients, however, we have discovered that a large number of you would prefer an electronic copy so long as it was easily accessible. We have found a solution that will help meet our “green” goals and also serve as a very cool tool for data storage and file transfers.
We are excited to announce we will soon be offering clients online data storage through our free “Client e-Access” service. Access will soon be available via our website. As a client, you will have a login ID and password to access data in a secure environment. Documents that we can place in client e-Access accounts include things such as completed tax returns, tax return source documents, financial statements, Microsoft Excel or Word files, PDF files, and payroll check stubs and records to name a few. File transfers, including QuickBooks, can be accomplished through e-Access as well. No more having to jump data files back and forth through thumb drives. E-Access is a more secure way of transferring data. Virtually any data that relates to the services we provide for you can be uploaded to your client e-Access account. The data you place in your e-Access account is up to you. The system is very flexible. We will provide you with more details soon.
Conclusion
As we said at the beginning, this letter is intended to give you just a few ideas to get you thinking about tax planning moves for the rest of this year. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning strategy session. We are at your service!
Happy Holidays,
Williams, Parsons & Schiller, PC
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