Year End Tax Saving Ideas For Individuals

There are a number of steps you might take by year-end to cut your 2011 tax bill, such as deferring income, accelerating deductions and capital gains planning.

Deferring Income

• If you are planning on selling an investment this year on which you have a gain, it may be best to wait until the following tax year to defer payment of the taxes for another year (subject to estimated tax requirements).
• If you are expecting a bonus at year-end, you may be able to defer receipt of these funds until January. This allows you to defer tax payments (other than the portion normally withheld) until the following year. However, keep in mind that you usually defer taxes on a bonus that is contractually due in 2011.
• If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
• If you're self employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients or customers until the end of December.

Caution: Keep an eye on the estimated tax requirements.

Accelerating Deductions

• Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
• Pay your entire property tax bill, including installments due in year 2012, by year-end. This does not apply to mortgage escrow accounts.
• Try to bunch "threshold" expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
  For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: In most cases, credit cards charges are considered paid in the year of the charge regardless of when you pay on the card. This, however, does not apply to store revolving credit cards, so if you charge expenses on a Wal-Mart store credit card, the deduction can not be claimed until the bill is paid.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2011. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.

Tip: Deferring income into 2012 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, generally because of much-reduced income or much-increased deductible expenses.

Tip: It may pay to accelerate income into 2011 if you think your marginal tax rate will be much lower this year than it will be next year.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
If you have any questions about estimated taxes, please call us.

Caution: Alternative Minimum Tax (AMT) no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the AMT for 2011.
Due to tax changes in recent years, AMT impacts many more taxpayers than ever before because the tax is not indexed to inflation. As a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax.
Items that may affect AMT include the deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.

Note: AMT Exemption Amounts For 2011

• $48,450 for single and head of household fliers;
• $74,450 for married people filing jointly and for qualifying widows or widowers, and
• $37,225 for married people filing separately.

Please call us if you'd like more information or if you're not sure whether AMT applies to you. We're happy to assist you.

Residential Energy Tax Credits

If you haven't taken advantage of energy tax credits for your home, 2011 is your last chance. The credits--10% of cost up to $500 or a specific amount from $50 - $300--expire on December 31, 2011 and only apply to improvements in an existing home that is your principal residence. New construction and rentals do not qualify.
The tax credits are as follows:

• Energy Star window tax credit: up to $200 maximum
• Water heater tax credit (includes electric, natural gas, propane, or oil): up to $300 maximum
• Air conditioner tax credit: up to $300 maximum
• Insulation, doors, and roof credits: up to the $500 cap
• Furnace tax credit (includes natural gas, propane, oil, or hot water): $150 maximum. Efficiency must be 95% (up from 90% before the extension)

Caution: Taxpayer is ineligible for this tax credit if this credit has already been claimed by the taxpayer in an amount of $500 in any previous year.

Make Charitable Contributions

You can donate property as well as money to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses however.
Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.

Investment Gains And Losses

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains, which in 2011 and 2012 are taxed at rates of zero and 15 percent depending on your tax bracket. Consider where feasible to reduce all capital gains and generate short-term capital losses up to $3,000 as well.

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.

Tip: After selling securities investment to generate a capital loss, you can repurchase it after 30 days. If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.

Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

Note: The maximum long term capital gains tax rate is currently 15 percent and will expire on December 31, 2012 when it's set to rise to a maximum of 20 percent. Also of note is that starting in 2013, a 3.8 percent medicare tax may also be applied to long term capital gains. This information is something to think about as you plan your long term investments.
Feel free to call us if you need assistance with any of your long term planning goals.

Mutual Fund Investments

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Example: You invest $20,000 in a mutual fund at the end of 2011. You opt for automatic reinvestment of dividends. In late December of 2011, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund's long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund's distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as "ordinary dividends" that don't qualify for relief.

Tip: Wait until after the dividend to buy the shares because the share net asset value will drop after the dividend is paid. Alternatively, buy the shares in 2011, but opt to take the dividend in cash instead of having it reinvested.

In spite of these tax consequences, it may be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.

Tip: To find out a fund's ex-dividend date, call the fund directly.

Call us if you'd like more information on how dividends paid out by mutual funds affect your taxes.

Year-End Giving To Reduce Your Potential Estate Tax

For many, sound estate planning begins with lifetime gifts to family members. in other words, gifts that reduce the donor's assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $13,000 a year per donee.

Caution: An unused annual exemption doesn't carry over to later years. To make use of the exemption for 2011, you must make your gift by December 31.

Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $26,000 ($13,000 each). Though what's given may come from either you or your spouse or from both of you, both of you must consent to such "split gifts".
Gifts of "future interests", assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don't qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.

Tip: If you're considering adopting a plan of lifetime giving to reduce future estate tax don't hesitate to call us. We can help you set it up.

Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift's true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.
Gift tax returns for 2011 are due the same date as your income tax return. Returns are required for gifts over $13,000 (including husband-wife split gifts totaling more than $13,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $13,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not "adequately disclosed".

Tip: Call us if you're considering making a gift of property whose value isn't unquestionably less than $13,000.

Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced 5% dividend rate.

Caution: In 2011, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $1,900 is taxed at the parent's tax rate.

Other Year-End Moves

Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don't already have one. (It doesn't need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year's return.)
If you are an employee and your employer has a 401(k), contribute the maximum amount ($16,500 for 2011 and $17,000 for 2012, plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don't apply).
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 7.5% of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2011, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,200 (single coverage) or $2,400 (family). It remains unchanged for 2012.

Summary

These are just a few of the steps you might take. Please contact us for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com