Connections for Success



Holiday Tipping Guide
Robert Swenson

Tip your mailman, maid, newspaper delivery person and don’t forget to tip yourself. Here are five tax planning tips to consider before year-end that could keep more money in your pocket.

  1. Traditional planning – accelerate deductions into 2011 and defer income into 2012. The tax rates will be the same for 2011 and 2012 so the goal is to minimize the tax impact over the two years. Rates are currently scheduled to rise in 2013 so there is some uncertainty on the horizon. Common deductions that can be accelerated are state income taxes, charitable donations, mortgage interest and medical expenses. Watch out for the Alternative Minimum Tax (AMT) trap. AMT is a parallel tax calculation that limits or disallows some deductions. You pay AMT when your liability exceeds your regular tax liability.
  2. The following tax breaks are currently set to expire after 2011 so take advantage of them while you can:
    – Sales Deduction Tax
    – Residential Energy Property Credit
    – Tax-free IRA distributions to charity
    – Above-the-line deduction for higher education and teacher’s out-of-pocket costs
    – Mortgage premium insurance
  3. Don’t forget about the 0% tax rate on long-term capital gains and qualified dividends. If your taxable income is below $69,000 for couples and $34,500 for singles, long-term capital gains and qualified dividends are taxed at a 0% rate. You won’t find a lower tax rate than that.
  4. Harvest capital losses to offset previous capital gains. If you have had the good fortune to realize some capital gains over the course of 2011, consider realizing some losses before year-end to eliminate the tax on those gains. Keep in mind a few things when realizing a stock loss; whether or not it is a wise investment decision, the wash sale rule and whether you have a capital loss carryover coming into 2011 from previous years. The wash rule will disallow certain capital losses. Generally, a wash sale occurs if you sell stock at a loss and then re-purchase the same stock within 30 days.
  5. Have you taken your Required Minimum Distribution (RMD) in 2011? Normally, once you reach age 70 ½ you must take annual RMDs from your IRAs. That sounds like alphabet soup, but if you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn. If you turned 70 ½ in 2011, then you can delay the distribution to April 2, 2012. Be careful if you decide to delay the distribution because you will have two RMDs to take in 2012, one for 2011 and one for 2012. Two distributions could cause you to move up a tax bracket.

With the year drawing to a close, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your bill. Please contact us to discuss these tips and other tax planning alternatives in greater detail.

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