Top Ten Things to Consider in Year-End Income Tax Planning

  1. Accelerate or defer incomeIf you have deferred compensation, consider which best suits your planning:  to take your earned income now and pay taxes immediately at today’s historically low tax rates or to defer income until later and pay taxes when rates may be higher. Similarly, if you are eligible for qualified plan distributions and option grants, you need to decide whether to accelerate income recognition.

  2. Paying deductible expenses sooner may help you in 2011.  Does it make sense for you to accelerate deductions into 2011?  If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.  This may include accelerating your estimated state income tax payment that would normally be due in January.
  3. Income tax rates to remain the same in 2012The same federal income tax rates that apply in 2011 will apply in 2012.  Based upon the level of your income, the current graduated rates are 10%, 15%, 25%, 28%, 33% or 35%.  Also, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you are in the 10% or 15% tax rate bracket, a special 0% tax rate will generally continue to apply.
  4. Harvest gains and losses before year-end.  Selling stock at a loss to offset capital gains is a classic year-end tax strategy.  Harvesting gains this year also may be especially useful if capital gains rates increase in the near future; however, investors should be careful not to violate the “wash sale rule,”  which disallows any loss if a taxpayer buys nearly identical securities 30 days before or after the sale.
  5. Make sure that your deferred compensation elections are in place by December 31.  You are allowed to defer salary and guaranteed or non-performance bonuses due in 2012 as long as you make the appropriate election by December 31, 2011.  The election must identify the timing of any future distributions of the deferred compensation and the mode by which those future payments will be made.

Closely-held and self-employed business owners who want to create a qualified plan must establish those plans by the end of the tax year.

  1. IRA and retirement plan contributions.  Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income.  Contributions that you make to a Roth IRA (assuming you meet the income requirements) are not deductible, so there’s no tax benefit for 2011-they’re still worth considering, though, because qualified distributions are free from federal income tax.  The window of opportunity to make 2011 contributions to your employer-sponsored plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
  2. IRA and retirement plan distribution requirements at age 70 ½.  Once you reach age 70 ½, your are generally obligated to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans.  It is important to make withdrawals by the date required- the end of the year for most individuals.  The penalty is significant for failing to do so:  50% of the amount that should have been distributed.  Absent new legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70 ½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying your RMDs obligation that you would otherwise have to take from your IRA for 2011).
  3. Diversify out of a concentrated stock position.  Diversifying out of a concentrated portfolio can greatly reduce risk in a portfolio, but it can also trigger a capital gains tax liability.  This liability can lead individuals to defer diversification, especially if the concentrated position has a low cost basis (which is often the case).  That delay, though, may cost you more.  Now is a particularly good time to consider diversifying because capital gains tax rates appear poised to increase to 20% or possibly higher in 2013.  Remember that the lower the basis, the higher the tax liability, and consequently, the higher the incremental return on any new investments will need to be as a way to compensate for those taxes.
  4. Depreciation and expense limits to drop for business owners and self-employed.  If you’re a small business owner or a self-employed individual, you’re permitted a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011.  This “bonus” first year additional depreciation deduction will drop to 50% for property acquired and place in service for 2012.  For 2011, the maximum amount that can be expensed under Section 179 of the Internal Revenue Code is $500,000, but in 2012 the limit will drop to $139,000.
  5. Last chance to deduct energy-efficient home improvements.  This is the last year to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property).  Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials.  Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers.  Note, however, that there is a lifetime credit cap of $500 ($200 for windows).  Therefore, if you have claimed the credit in one or more years since 2005, you will only be entitled to the difference between the current cap and the amount claimed in the past.

For more information, please contact Mark E. Kellogg at 517.377.0890 or at  The above information is not intended to be legal, tax or investment advice.  Please consult with your attorney or tax advisor prior to making any tax decisions.


©2011 Fraser Trebilcock Davis & Dunlap, P.C. All rights reserved.

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