Tax Planning

Generally, your objective is to defer income and accelerate deductions. This strategy may enable you to claim larger deductions, credits, and other tax breaks that are phased out over varying levels of income. If you’re self-employed and use the cash method of accounting, hold off on sending out invoices until very late in the year so that you don’t receive payment until next year. If you receive payment before year-end, deferring the deposit doesn’t defer the income. On the expenses side, wherever possible, try to accelerate deductions into this year by stocking up on supplies, paying employee bonuses, making charitable contributions, and prepaying January bills during December. Consider using a credit card to prepay expenses that can generate deductions for this year.

Accrual method businesses can delay shipping products or providing services until after year-end to defer income. Certain bonuses accrued, but not paid by year-end, may still be deductible. This strategy is appropriate if 1) the employee doesn’t own more than 50% of the business and 2) the bonus is paid within the first two-and-a-half months of the following tax year.

Contributing to a retirement plan is one of the best ways to reduce your taxable income and secure your financial future.

You can contribute up to $5,000 ($6,000 if you’re age 50 or older by year-end) to your IRA if certain conditions are met. For married couples, the combined contribution limits are $10,000 ($5,000 each) and $12,000 ($6,000 each if both are age 50 or older by year-end) when a joint return is filed provided one or both spouses had at least that much earned income. If you’re an active participant in your employer’s retirement plan, your traditional IRA deduction is phased out ratably as your adjusted gross income (AGI) increases from $90,000 to $110,000 on a joint return ($56,000 to $66,000 on a single return). If your spouse is an active participant in his or her employer’s plan and you aren’t an active participant in a plan, you may contribute the full amount to a traditional IRA as long as the AGI on your joint return is $169,000 or less. The deduction for the non-active participant spouse begins to phase out when your AGI reaches $169,000 and is totally phased out once it reaches $179,000.

Every dollar you contribute to a deductible IRA reduces your allowable contribution to a nondeductible Roth IRA. Your ability to contribute to a Roth IRA is phased out ratably as your AGI increases from $169,000 to $179,000 on a joint return or from $107,000 to $122,000 on a single return.

If you’re covered by your company’s 401(k) plan, you should consider putting as much of your compensation into the plan as allowable. The maximum amount is $16,500 ($22,000 if you’re age 50 or older by year-end).

If you’re self-employed, consider a small business retirement account such as a SEP IRA, SIMPLE IRA, Individual 401(k) or other qualified retirement plan. Contributing to a plan can enable you to reduce your current tax load while increasing your retirement savings. With a SEP IRA, you generally can contribute up to 20% of your net self-employment earnings, with a maximum contribution of $49,000 ($54,500 if you’re age 50 or older by year-end). A SIMPLE IRA, on the other hand, allows you to set aside up to $11,500 plus an employer match. In addition, if you’re age 50 or older by year-end, you can contribute an additional $2,500 to a SIMPLE IRA. Generally, calendar-year taxpayers wishing to establish a qualified retirement plan for this year must adopt the plan by December 31. Exceptions to this general rule apply to SEP and SIMPLE plans. You have until the day you file next year, including extensions, to make this year’s employer contribution.

If you’re considering making a contribution to charity, it’ll generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to charity. By contributing capital gain property held more than one year (e.g., appreciated stock), a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and give away the cash sales proceeds. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Normally, the advice is to offset capital gains with capital losses. In other words, if you’ve sold profitable investments, find some losing investments you can sell to minimize or eliminate your capital gains tax. However, investors have significant losses being carried over. Capital losses will offset capital gains, and any excess losses are deductible up to $3,000 per year.

Perhaps we need to reverse the traditional advice and try to sell investments with gains to offset losses. One strategy might be to sell profitable investments and repurchase them immediately. This creates a capital gain for tax purposes, uses up some losses, and gives you a new cost basis position in the investment. This tactic isn’t prohibited by the wash sale rule, which only applies when you sell an investment at a loss and repurchase the same investment within 30 days. If you’re selling an investment at a profit, the wash sale rule doesn’t apply.

If you’re thinking about upgrading your computer system, purchasing furniture, or buying machinery or other equipment for your business, purchasing it now will enable you to write off the costs against this year’s income. Code Section 179 permits you to “expense” or fully deduct up to $500,000 of qualified purchases. If you’re short of cash, you can finance the purchase. This deduction phases out, dollar-for-dollar, after eligible purchases reach $2,000,000.

A taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property.

Generally, sport utility vehicles (SUVs) weighing over 6,000 lbs. are entitled to a maximum first-year expensing deduction of $25,000. However, there’s no limit on the 100% bonus first-year depreciation allowance for SUVs weighing over 6,000 lbs.

Business vehicles with a gross vehicle weight of less than 6,000 lbs. are subject to certain depreciation limitations. However, if you acquire and place-in-service such a new (not used) vehicle before year-end, you can receive up to an $8,000 additional first-year depreciation deduction.

Without any legislative action, bonus depreciation and Code Section 179 expensing limits will drop significantly in 2012.

If you own an interest in a partnership or S-corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year. If you think this situation applies to you, please contact our office to discuss your specific situation since the basis and loan deduction rules are complex and beyond the scope of this letter.

If you’re a more than 2% S-corporation owner-employee, make sure the health insurance premiums paid for or reimbursed to you by the S-corporation are included in your W-2 in order to deduct the premiums as an “above-the-line” deduction on your personal return.

Make energy saving improvements to your principal residence, such as energy efficient insulation, doors, windows, roofs, and heating and cooling systems, and qualify for a tax credit for qualified expenditures. The maximum credit for 2011 is $500, but must be reduced by any energy-efficient credit taken prior to 2011.

One way to avoid a penalty for failing to pay or withhold sufficient income taxes is to pay 100% of your prior year’s tax liability in quarterly estimated payments or through income tax withholding. If your prior year’s AGI was over $150,000, you must pay in 110% of your prior year’s tax liability to qualify for this safe harbor.

Estimated tax payments can’t be “made up” at year-end. However, if you’ve not paid sufficient estimates to avoid an underpayment penalty, you may have additional amounts withheld from your wages, year-end bonuses, or retirement distributions. Any withholding is deemed paid equally on each quarterly installment date for estimated tax purposes, even if the withholding occurs in December.

If you anticipate deducting your state income taxes and you aren’t vulnerable to the alternative minimum tax, consider paying your fourth-quarter estimated state income taxes by December 31 so you can take the deduction on this year’s return. The same idea applies to property taxes as well.