Time for year end tax planning - Part 1

It is always advisable as the year comes to a close to take a look at your situation related to your tax positions so that you can react appropriately to upcoming tax law changes and also the current status of all of your tax related matters.  I am providing a checklist of actions you may be able to take prior to the end of the year to benefit from the current tax laws.  Regardless of any action that Congress may take these will still be available for you for the 2011 tax year.  Not all of the topics may apply to you, but hopefully there will be some value.  I am breaking this up into more than one post, so let's get started with Part 1.

Here are some points that apply to individuals:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;
• the above-the-line deduction for qualified higher education expenses; and
• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

Here are some points that affect businesses:

• 100 percent bonus first-year depreciation for most new machinery, equipment and software;
• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and
• the research tax credit.

Be Aware of the Alternative Minimum Tax (AMT) - Keep in mind when considering year-end tax strategies that many of the tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, these deductions should not be accelerated.

Employer Flexible Spending Accounts - If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs. For those of you that may not be familiar with the benefits of a Flexible Spending Account, this is a method of setting money aside to cover medical expenses from your pre-tax income.  It can be valuable if you can predict your expenses for the year and the risk is that the money must be used during the year and does not carry over to the following year's pool (with the exception of the grace period).

Health Savings Accounts - If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.

Capital Gains and Losses - You can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses.

I hope you found something in this article that will benefit you.  In the next post we will discuss Roth IRA's, conversions, income acceleration/deferral and others.  If you have any questions related to anything covered here please feel free to contact me.