2011 Year End Planning

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there 'is no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again “patch” the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era 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 December 31, 2012.

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. For individuals these include:

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 (50% bonus first-year depreciation is still available in 2012);
• An extraordinarily high $500,000 Section 1790 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property);
• The research tax credit.

This list is not intended to be comprehensive. It is important that you discuss with us a year-end tax plan specifically tailored to your particular situation.

Year-End Tax Planning Moves for Individuals 

• Review the amount you set aside in your employer's health flexible spending account (FSA). If you set aside too little for this year, increase the amount. Don't forget that over-the-counter drugs, such as aspirin and antacids are no long eligible for reimbursements under an FSA.
• 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.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you may wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
• If you are a homeowner and you have not used your lifetime energy credit limit, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and energy efficient heaters or air conditioners. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
• You may want to pay contested state and local taxes to be able to deduct them this year while continuing to contest them next year.
• If you are age 70½ or older, own IRAs, and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, know as Qualified Charitable Distribution (QCD), if made before year-end, you may achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) if you have reached age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70½ in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
• Take advantage of the Opportunity Maine Credit which is available to Maine residents. Qualifying graduates and employers making eligible education loan payments may qualify for the credit.

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

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, Section 179 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-phaseout 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. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• For tax years beginning on or after January 1, 2011, the State of Maine fully conforms with the federal expensing rules on property placed in service during the taxable year, up to $500,000. Section 179 expensing amount was limited to $25,000 in the past which caused a difference between the federal depreciation and the amount allowed by the State to be added to Maine income.
• 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 (50% bonus first-year depreciation is still available for 2012) Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• A new Maine Capital Investment Credit is available for businesses that place depreciable property in service in Maine during tax years beginning in 2011 and 2012. The credit equals to 10 percent of the federal bonus depreciation.
• 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.
• To encourage smaller businesses to offer medical insurance coverage for their employees, the law offers a tax credit to offset all or part of the cost. If your business qualifies as a small employer, meaning fewer than 25 employees and average annual wages of less than $50,000, you may be eligible for a credit of up to 35 percent of nonelective contributions you make on behalf of your employees for medical insurance premiums. The credit varies based on the number of employees and average compensation. Very small employers with 10 or fewer employees and average wages of less than $25,000 may be eligible for the entire 35 percent credit.
• Economic pressures are causing many historically profitable businesses to experience operatiing losses. If you are an owner of a pass-through business entity operating as a partnership, LLC, S corporation or trust, and the business will incur a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss on your personal tax return.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Sincerely,