Tax Moves For The Rest Of 2011

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

What will be happening in 2012 is totally unknown. There may be tax reform enacted before the end of the year, various provisions may expire (like the option to deduct state and local sales and use tax instead of income tax, the tax credit for energy saving home improvements, and  the above-the-line deduction for qualified higher education expenses), and the Bush tax cuts may end after 2012.

The ‘Super Committee’ (actually the Joint Select Committee on Deficit Reduction) may issue their report, and Congress may even approve their recommendations on major tax reform. Congress has to compromise on the continued low tax rates for long-term gains and qualified dividends, as well as gift and estate rules, the alternative minimum tax, and more.

In reviewing your finances, year-end planning generally suggests deferring income and accelerating deductions to minimize 2011 taxes, but not for everyone.

• Flexible Spending Account (FSA): Increase the amount you set aside for 2011 if it looks like your medical expenses will be higher in 2012. Remember, you cannot use the FSA for over-the-counter drugs like aspirin. Also, review your other flexible areas like child care.
• Health Savings Account (HAS): If you are eligible, make your 2012 contributions in December, 2011 to get the benefit this year.
• Stock Losses: If you have stocks which are down, but you want to keep that investment, sell them, and then buy back the same security AFTER 31 days. You now have a deductible loss (up to $3,000 against ordinary income). First though, check your tax return to see if you have carry-forward losses. Also, do call your tax preparer to discuss this strategy.
• Postpone Income, Accelerate Deductions: By postponing income until 2012, and accelerating deductions into 2011, you claim larger deductions, as well as credits and tax breaks in 2011 if these would be phased-out at your income level. Some of these items are the child tax credit, higher education tax credit, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. If your financial situation is changing and you know your tax bracket will be different next year, you may want to postpone income.
• Convert to a Roth IRA: If your traditional IRA stock market investments are worth much less than your basis, and you plan to be in the market for a long time, converting them to a Roth IRA may be a good strategy. Remember though, that the conversion will increase your 2011 adjusted gross income.
• Re-convert your Roth IRA Conversion: If you converted into a Roth IRA from the traditional IRA this year, and if the value of your account is lower, you may want to re-convert if you taxes are higher due to the conversion. You can then re-convert later.
• Bonus: Possibly defer your 2011 bonus to 2012.
• Deductions: Use your credit card to prepay 2012 expenses to capture the expense in 2011.
• State & City Income Taxes: If you won’t be subject to the Alternative Minimum Tax (AMT), and if you generally owe State and local income tax, consider increasing your withholding taxes, or making your estimated payment by December 31 to get this deduction this year.
• Subject to Underpayment Penalty? If extra withholding won’t solve your ‘underpayment of estimated tax’ problem, consider taking a rollover distribution from a qualified retirement plan. Income tax withheld from your 2011 distribution will apply to 2011, and if you roll over the full amount of the distribution (including the withholding tax amount) to another traditional IRA within 60 days, none of the distribution will be included in income. (Withholding, no matter when withheld, is considered taken equally throughout the year.)
• Alternative Minimum Tax (AMT): Always keep in mind the AMT. Various deductions are disallowed in this computation, such as your residence property tax, state income tax or sales tax, miscellaneous itemized deductions, and personal exemptions, as well as a further adjustment to medical expenses. (So maybe some deductions should not be accelerated.)
• Bunching Strategy: To exceed the thresholds in the medical and miscellaneous itemized deduction areas, consider ‘bunching’ your expenses every other year. (Pay or prepay in 2011, and hold back in 2012.)
• Energy Saving Improvement Credit: Unless extended by Congress, this is the final year to let Uncle Sam pay part of you bill.
• The Up-To-$4,000 Above-the-Line Deduction for Qualified Higher Education Expenses: Unless extended by Congress, 2011 is the last year for this deduction. If you are eligible, consider prepaying these expenses to be able to take advantage of this deduction.
• Contesting Deductible Taxes? Consider paying them to get the deduction, but still continue contesting them.
• Storm Damage? To maximize your casualty loss deduction, consider settling with the insurance company.
• 70-1/2 & Charitably Inclined? Arrange for you gift to be make directly from your IRA before December 31. You get the deductions as well as your normal distribution.
• RMD: If you are subject to take a required minimum distribution (RMD), don’t forget to take it by the year-end. If you just turned 70-1/2, but can delay your withdrawal until next year, therefore having two withdrawals in 2012, call your tax preparer to see the effect on your taxes.
• Gifts: You can give up to $13,000 to as many people as you want without any gift tax or estate ramifications. Any unused amount cannot be carried over to the next year.
• 529 College Savings Plan: Are you a New York resident? A contribution to the NY State plan can save you six to 11 percent of the contribution if made by December 31. Other States may have the same benefit.
• Prepay Your Tax Preparation Fee: Or not.

Note: One of the great blessings about living in a democracy [Ed — We are a constitutional republic]  is that we have complete control over how we pay our taxes… cash, check or money order.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.

Have a good week.