Tax Planning 2011: Smart Moves to Make Now
Make these tax moves now The year is winding down, and before long you'll find yourself caught up in holiday festivities. But before you start having too much fun, take some time to evaluate your tax situation for 2011.
No, dealing with your taxes is not as much fun as, well, just about anything else. It can, however, be more lucrative.
You can do several things in the final days of the year to reduce what you might owe the Internal Revenue Service when you file your tax return next year.
So, in between all those seasonal events, pencil in some year-end tax-planning time. We'll even get you started. The following slides offer 10 tax moves to make by Dec. 31.
You'll be glad you did. The tax savings could be the best gift you get this year.
Harvest capital losses The one good thing about 2011's volatile stock market is that it might offer some tax savings. If you cashed in on some profitable holdings, sell assets that didn't do as well by the end of the year and use those losses to offset your capital gains.
If you have more losses than gains, you're not alone. But you also can deduct up to $3,000 in losses against ordinary income. If you have more than $3,000 in losses, you're probably not alone here either. Save the paperwork on that excess loss amount. You can carry it forward and deduct it in future tax years.
And don't forget to check your prior year's tax material to make sure you don't have any older losses to carry forward on your 2011 return, says David Fleisher, president of Firstrust Financial Resources in Philadelphia.
Now is also a good time to make sure you have updated the cost basis on your nonretirement holdings, says Fleisher. When you do sell the assets, you'll need the correct basis to determine whether you have a loss or taxable gain.
Pay tax-deductible home expenses Make room in your holiday budget for some year-end payments that could cut your tax bill.
Pay your January mortgage by Dec. 31 to get an added interest deduction this tax year. Don't worry about restrictions on prepaid interest. Your Jan. 1 house payment covers December occupancy, meaning the interest for that month is fully deductible if you itemize.
Another home-related payment to make early is your property tax bill. Real estate tax bills issued in the fall typically aren't due until the following year. County tax collectors, however, will gladly accept payment sooner. By paying before the end of the year, itemizers can deduct this amount, too.
And if you pay estimated taxes to your state tax collector, pay your fourth-quarter installment by the end of the year, says Bob Meighan, a CPA and TurboTax vice president. This will increase the amount of state income taxes you can deduct on Schedule A.
Remember, though, if you owe the alternative minimum tax, or AMT, then your state and local income tax and property tax deductions won't do you any good. They aren't allowed under this parallel tax system. Your mortgage interest deduction also could be limited by the AMT.
Bunch deductible expenses Itemizing taxpayers can boost miscellaneous deductions by bunching payments in a single tax year.
Popular write-offs in this Schedule A category include unreimbursed business expenses such as professional journal subscriptions, work-related classes, legal fees and licenses, and job-required uniforms that you bought.
But you can only claim eligible expenses that exceed 2 percent of your adjusted gross income. To clear that deduction hurdle, make as many of these expenditures as possible by the end of the year.
If your budget is tight, you can pay them by Dec. 31 using a credit card. Allowable business expenses can be deducted in the tax year they are charged.
Of course, if you prepay these expenses this year, then you'll likely come up short in the miscellaneous deductions area the next tax year. So run some rough numbers to make sure it's worth accelerating these expenses now.
And note that the alternative minimum tax comes into play here, too. Miscellaneous itemized deductions aren't allowed at all under the AMT.
Give to charity You must itemize to deduct charitable donations, but for most taxpayers, there's no limit to worry about. You must, however, donate by the tax year's end.
You can donate cash, write a check or charge the gift on a credit card. As long as you do so by Dec. 31, they're deductible on that year's tax return.
The same time frame applies to gifts of clothing, household goods or other less-common donations, such as appreciated assets.
And older donors have a special option. If you're 70½ or older, you can roll a required minimum distribution from a traditional IRA or other tax-deferred retirement plan directly to a qualified charity. This allows you to satisfy the distribution rules, but since you don't take the money, you won't owe taxes on it.
This tax break is especially advantageous to seniors who don't itemize, says Mark Luscombe, a tax attorney, CPA and principal federal tax analyst with CCH tax publishing and software company in Riverwoods, Ill.
If you're old enough, consider taking advantage of the rollover option this year. It's set to expire at the end of 2011.
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