Top 10 Tax Planning Strategies
It’s nearing December 31. For most tax-planning strategies, December 31 is a hard deadline.
I’m going to borrow from David Letterman and give you my Top 10 Action Tax Service Tax Planning Strategies. Since Herman Cain dropped out of the presidential race, I think it’s a fair bet that our current tax system is going to stay in place for the foreseeable future. Since our country is drowning in debt, I also think it’s a fair bet that after the presidential election, there will be major tax changes within that system. I believe those changes will result in tax increases. Our federal government will come to the same conclusion that was reached in the State of Michigan.
In Michigan, Governor Snyder determined that balancing the budget with smoke and mirrors wouldn’t work anymore. Changes were made. Some of them are painful.
At the federal level, continuing to print money isn’t the answer. It won’t work anymore and changes have to be made. Some of them will be painful.
In the meantime, there are items we might consider between now and December 31. Here are my Top 10 planning considerations.
1. Make contributions to your favorite charities. Write the check by December 31 or go online and use a credit card to make the contribution. In order to ensure you get the deduction, get a receipt. As I stated in last week’s article, the great credits available on the Michigan return for homeless shelters/food banks, public TV/radio, museums/libraries, and community foundations are all eliminated as of January 1, 2012. Make those contributions before the stroke of midnight on the 31st to get the credit on this year’s tax return.
2. Consider paying real estate property taxes in 2011. If you itemize, paying them in this year may prove beneficial. If you make the payment on December 27, 2011 and you file your return on February 27, 2012, you realize a tax benefit 60 days after spending the money. However, if you make the payment on February 12, 2012 and your 2012 tax return is not filed until February 27, 2013, you will wait for an entire year to pass before you receive a tax benefit. Of course, if you don’t itemize deductions, paying the taxes early is not beneficial.
3. Consider paying your last estimated payment to Michigan in 2011. Again, if you itemize, the paying of state taxes is a deduction on the federal return in the year paid. If you make the payment in 2011, you will realize that tax benefit sooner than having to wait a full year.
4. For those in business, consider buying equipment or vehicles in 2011. The write-off rules are very generous in 2011. Under the Bonus depreciation rules, in the right circumstances, new equipment may be totally written off in the year of purchase. If the equipment doesn’t qualify under the Bonus depreciation rules, perhaps the Section 179 depreciation rules will allow the business to write off the entire cost of the equipment.
5. Look carefully at unrealized capital gains and losses in your portfolio. Due to the Bush tax cuts, capital gains tax rates are historically low. This may not continue past next year. Consider realizing profits to take advantage of the low rates or to offset loss carry-forwards.
6. Make a contribution of those unused clothes or toys to one of the collection agencies such as Goodwill, Salvation Army or North Kent Community Services. They can be written off as an itemized deduction at the fair market value. Get a receipt. Itemize the items donated. Take a picture as visual proof of the items given. You might enjoy the tax savings more than you are enjoying a closet full of unused clothing or a box of old toys.
7. Gather receipts for energy credit property improvements such as insulation, exterior windows, exterior doors, certain qualified metal and asphalt roofs, and qualified high-energy natural gas, propane or oil furnaces. The energy credit is 10% of the qualifying expenditures, subject to lifetime limits of $500 of credit. Certain other restrictions apply, of course.
8. For the educators in the audience, the $250 above-the-line deduction was reinstituted for another year. Eligible educators are those who teach in kindergarten through grade 12, including teachers, counselors, principals or aides who have classroom time of at least 900 hours. Eligible expenses include supplies, computer equipment, books, and any other items that are used by the educator in the context of the classroom.
9. Take advantage of the qualified charitable distribution rule available for 2011. Taxpayers age 70-1/2 or older may direct distributions from their traditional or Roth IRA to be made to their favorite charities. The maximum that may be distributed to the charity is $100,000, but that is a pure $100,000. It is not part of the taxpayer’s tax return, so it is not subject to income limits or phase-outs. Since it’s not part of the tax return, the taxpayers do not get a deduction but they also do not have to pay tax on the distribution. It simply is not part of the tax return. Distributions do qualify as part of the taxpayers’ required minimum distribution. This rule does expire on December 31 and, as of right now, will not be allowed in 2012 so make sure the paperwork is all completed this year.
10.Consider talking to a tax professional for tax advice. Our tax system is extremely complicated today. There are loopholes that are big enough to drive a Mack truck through but there are also pitfalls that can trip up even the most astute taxpayers. Most tax professionals are putting in longer hours right now because they are tax planning with their clients. Getting technical advice on a subject today may be a smart thing to do.
Those are my Action Tax Service Top 10 items to think about as we wind down this year of 2011. I wish a very Merry Christmas to all reading this article. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Dr. in Rockford. Contact Jerry at www.actiontaxservice.com.