Tax Time!!!

Its tax time!!!  Almost as exciting as cleaning out your sock drawer, it’s time to start planning for any year end strategies that will minimize your 2011 tax bill. The ultimate goal: take actions in the next several weeks that will cement money saving deductions and credits when you ultimately file your 2011 tax return.  Consider the following:  

  • ·         Reduce your taxable income-You are able to sock away up to $16,500 into your Company’s 401K plan tax free.  In many instances by taking your income off the table on the front end, it can be a less painful way to plan for retirement; you may not even realize the reduction in discretionary income.
  • ·         Tax loss harvesting – It continues to be good practice to review your investment portfolio and recognize capital losses to offset gains.  You may still have a capital loss carry forward from prior years which can continue to be extended during your lifetime for Federal tax purposes.  Most states also allow you to carry these losses forward.  The rules surrounding tax loss selling remains:
    • Losses can be used to offset gains.
    • You can deduct up to $3,000 in losses above capital gains against ordinary income.
    • You can sell a security at a loss and buy a similar security or index in the same sector or wait 31 days and buy back the same security.
    • Alternatively, if you have a positive view on a security and do not want to be on the sideline for 31 days, you can double up your position before November 30th, hold for 31 days and then sell the original holding to realize the capital loss.
  • ·         Bright note to college tuition costs –For 2011, you can deduct up to $4,000 for college tuition for yourself, your spouse or your darling, well deserving children.  This is true even if you don’t typically itemize deductions.  There is an array of college deductions and credits including the ability to deduct for interest you pay on college loans. 

To maximize your benefit, consider paying now for next year if 2011 tuition and fees haven’t totaled $4,000.

  • ·         Accelerate income – Where you have some flexibility, it may be beneficial for you to receive income and take gains before year-end.  Long-term capital gains for example are currently taxed at 15% at the federal level. 
  • ·         RMD’s – Required Minimum Distribution (RMD) rules were back in effect for 2010 and 2011 after a years’ reprieve.  Anyone who is subject to RMD’s (most notably if you are age 70 ½ or older in 2011) must take their income before 12/31 or else face extremely steep penalties. 
  • ·         Charitably inclined? Clean house-Empty out your old closets now and donate clothes, furniture and other assets to your favorite cause.  Make sure that you are donating your “valuables” to a qualified organization (section 501(c) 3 organization) to get that deduction.

If you are 70 ½ or older and have an IRA, you can make charitable contributions directly from your IRA.  The contributions will count as your mandatory withdrawals and you can avoid paying the dreaded tax on them.  Since this benefit is scheduled to expire at the end of this year, use this strategy in 2011.

  • ·         Gifting – You can make annual exclusion gifts of $13,000 each year per recipient.  Please make sure to take advantage of making gifts before 12/31 if you have not already done so.  Reducing the size of one’s estate can still be an important objective in order to reduce potential estate taxes.
  • ·         Flexible spending accounts – If you participate in a health care spending account, for example, reminder to make sure that you have accumulated enough medical expenses before 12/31 to offset what you contributed to the account as they are a “use it or lose it” plan
  • ·         Become Green-Many of the credits formerly available for energy efficient cars and home improvements no longer exist.  However you can still get a $500 credit from improvements such as insulated windows or energy efficient heating and air conditioning systems. There is also a special tax credit for certain types of plug in electric vehicles.



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