It is that time of year again! Time to put up the holiday displays, be merry, spend money, and get ready for tax season! A lot of people don’t want to think about it, but (if you plan properly) the happiest time of the year is just around the corner. The actions you take in these final months of 2011 can have a big effect on your taxes. This article will identify some key strategies that should be implemented prior to the end of the year to effectively limit your tax liability.
As with any other tax year, the more taxable income your company makes in 2011, the more taxes you and your company will pay. Therefore, it is logical to defer any ordinary income you can until next year. This is especially true if you or your business will be in a lower tax bracket this year as a result of your tax planning.
For business tax planning, send out monthly billing later in the month of December. Because it takes, on average, 25 days to receive payment, any payments received after January 1, 2012 are credited and recognized as income in 2012, provided your business is on the cash method of accounting.
For individuals, if you are to receive a bonus, defer it until next year. (BE CAREFUL – if you have a retirement plan that is based on a percentage of your gross pay for the year, you do not want to reduce your retirement contribution because of your deferred bonus.) Finally, you may decide to defer income using more traditional means, by participating in a deferred compensation plan, buying tax deferred treasury securities, or some specific certificates of deposit that allow for deferral of interest income.
We all hate paying bills, but now is the best time to pay them. Even if you wait to pay a given bill on December 31, you can still deduct the payment in 2011. For business tax planning, buy supplies in December and stock up for the next few months. In addition, the IRS will allow you to deduct the expense if you have charged the item and not yet paid for it as long as you are on the accrual method of reporting. For example, use your company credit card to purchase supplies for January, deduct the expense now, and pay the bill in January.
Individuals, remember to recognize any capital losses that you may have before year end. You are allowed to offset capital gains each year with any losses you incurred, and if the loss isn’t fully utilized this year, it can be carried forward to offset future gains to the extent of $3,000 per year. Pay your investment expenses early, including any mortgage interest, real estate taxes, and any state and local taxes.
Beefing up Section 179 Deductions
As part of the Small Business Act of 2010, businesses can expense up to $500,000 of equipment purchases under Section 179 of the Internal Revenue Code. This enhanced deduction ends December 31, 2011. In 2012, the maximum Section 179 deduction will be limited to slightly above $125,000, depending on the inflationary adjustment. Investing now allows you to utilize a valuable enhanced deduction.
Bonus Depreciation is still valid for 2011! The bonus amount of the depreciation is now 100% for original use qualifying property. On January 2012, the bonus depreciation is limited to 50% of the qualifying, original use property.
Businesses and individuals can make and deduct charitable contributions. Individuals have large deductible limits, generally around 50%. C corporations are generally limited to 10% of profits. Make an early contribution to your favorite charity. This contribution can include personal property such as clothing and furniture, but remember to keep receipts for future proof of your generosity. Additionally, if the charitable deduction (of noncash items) for the year totals $5000 or more (including C corporations) a qualified appraisal must be made and attached to the tax return. Utilizing your credit card can be advantageous here as well, as more charities are accepting credit card donations.
Look for Tax Credits
Tax credits are one of the most beneficial tax planning tools available to many individuals today. They are a dollar for dollar credit applied to your taxes due. Some examples for individuals include the Child Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit. Also, remember to use up any money set aside in a flexible spending account health plan (otherwise known as a “Cafeteria Plan”). The money left in these funds does not typically carry over to the following year.
By utilizing these year-end tax strategies, you can reduce your tax liability for the year. Lowering taxable income by deferring income, accelerating deductions, giving to charity, and utilizing tax credits, results in lower tax liability. These methods work not only this year, but also year-to-year.
Keep in mind that you have until December 31 to take advantage of 2011’s gift exemption of $13,000. If you need assistance, contact the professionals at The Center.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors