Year End Tax Planning 2011

Wow, what a year! This summer was unusually harsh with the lack of rain and the sweltering temperatures. We have many good things to look forward to: the upcoming holidays, time with family and cooler temperatures. This is also a good time to start year-end tax planning to help save taxes for 2011 and future years.

Here are some things to keep in mind and evaluate before ringing in the New Year!

GET DEPRECIABLE ASSETS PLACED IN SERVICE BEFORE YEAR END

One of the more generous deductions business owners can take advantage of this year is to acquire and place in service depreciable assets needed to help with current or planned expanded business operations. You may want to consider accelerating capital expenditures into 2011.

• IRC Section 179 Expensing Election. The maximum Section 179 deduction is bigger this year coming in at $500,000. For 2012 and future years, the maximum deduction is scheduled to drop back to $125,000.

• IRC Section 179 Deduction for Real Estate. Businesses can currently deduct up to $250,000 of qualified costs for restaurant buildings and improvements to interiors of retail and leased nonresidential buildings. This $250,000 allowance for these real estate expenditures is part of the overall $500,000 allowance.

• 100% First-Year Bonus Depreciation. This deduction is available for new assets placed in service. For business automobiles placed in service this year that means an increase in the maximum first-year depreciation deduction by $8,000. This depreciation break will expire at year-end unless Congress acts to extend it.

Please Note: Bonus depreciation can create or increase a Net Operating Loss (NOL) for your business’s 2011 tax year. This current year NOL can then be carried back to your previous tax years 2009 and 2010 to collect refunds for taxes paid in those years.

BETTER TO GIVE THAN RECEIVE - CHARITABLE PLANNING

Make Charitable Gifts of Appreciated Securities. If your investment portfolio contains appreciated positions in securities and you plan to make charitable contributions before year-end, keep your cash and donate those appreciated securities instead. You’ll avoid paying tax on the appreciation, but are still entitled to deduct the donated property’s full value.

Make Charitable Donations from Your IRA and Satisfy RMD rules. Individuals age 70½ are generally required to take withdrawals from their retirement accounts based on the size of their account and their age each year once attaining age 70½, referred to as their Required Minimum Distribution (RMD). For 2011 you have some options. If you’re required to take an RMD, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to IRS-approved public charities. This transfer not only qualifies as a payout for purposes of the RMD rules, it is also federal-income–tax-free to you, but you don’t get to claim a charitable deduction on your Form 1040.

Please Note: 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 acts to extend it.

NETTING SECURITIES TRANSACTIONS

What an up and down year in the market! Strap on your seatbelt and hold on, the market volatility isn’t likely to quiet down anytime soon. If you were fortunate enough to lock in gains recognized earlier this year, you should consider selling enough losers between now and year-end to help offset any capital gains.

WINDOW OF OPPORTUNITY FOR ESTATE PLANNING

2011 and 2012 - Federal gift and estate tax exemption is $5 million, 35% maximum rate
2013 & future years - Federal gift and estate tax exemption is $1 million, 55% maximum rate

Proper estate planning is still a necessary part of any financial planning to help assure short and long term goals are met. Even if you already have a good plan, it may need updating to reflect the current $5 million exemption.

GENERALLY SPEAKING, OF COURSE

Lastly, here are some things to consider before year end:

• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill.

• Consider using a credit card to prepay expenses that can generate deductions for this year.

• If you own an interest in a partnership or S corporation, you may need to increase your cost basis in the entity so you can deduct any losses for this year.

THE TAX MAN GIVETH, AND TAKETH AWAY

Be mindful of the impact from the Alternative Minimum Tax (AMT) in your planning. This is a parallel calculation that must be performed to evaluate the amount of regular tax in relation to this alternate method. What may be a great move for regular tax purposes may create or increase an AMT problem.

PERSONALIZED PROFESSIONAL SERVICE

With the implementation of the above strategies it’s possible to lower your 2011 tax liability. These ideas are a good start, but with the hands on approach we take with our clients, we can assist you with your unique year-end planning needs. We’d be happy to set up a planning meeting or assist you in any other way that we can.