Strategies for Year-End Tax Planning

Year-end tax planning is particularly challenging this year because of uncertainty over whether Congress will pass comprehensive tax reform that could have a major impact in 2012 and beyond. 

Even if there’s no major tax legislation in the immediate future, Congress will still have to contend with a multitude of difficult issues, such as whether to once again “patch” the alternative minimum tax (ATM) to avoid a drastic drop in post-2011 exemption amounts.

Congress will also need to decide what to do about the post-2012 expiration of income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.

However, regardless of what Congress does late this year or early in 2013, there are tax savings you can take advantage of that are on the books for 2011 but may be gone next year unless they are extended by Congress.

Individuals have the option to deduct the following items:

  • State and local sales and use taxes instead of state and local income taxes;
  • The above-the-line deduction for qualified higher education expenses;
  • Tax-free distributions by those age 701⁄2 or older from IRAs for charitable purposes.

For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include:

  • 100% bonus first year depreciation for most new machinery, equipment and software;
  • An extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property);
  • The research tax credit

 Year-End Tax-Planning Moves for Businesses and Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000 and a limited amount of expensing may be claimed for qualified real property.

However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phase out amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to currently deduct most, if not all their outlays for machinery and equipment.

 The expensing deduction is not prorated for the time that the asset is in service during the year, which opens up significant year-end planning opportunities.

Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year write-off generally won’t be available next year unless Congress acts to extend it.

 Those who plan to purchase new depreciable property this year or the next should try to accelerate their buying plans if doing so makes sound business sense.

Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won’t be available for workers hired after this year.

Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps and strategies that can be taken to save taxes. Ask your tax advisor to create a plan that works best for you.