Year End Tax Planning

In the past couple of years, Congress made sweeping changes or last minute extensions to existing tax laws late in the year causing uncertainty as to how best to plan for the upcoming tax season. This year, however, the song basically remains the same. Other than adjustments for inflation, tax laws and deductions for 2011 look much like 2010. Some anticipated changes may occur in 2012 prompting tax and financial planners to advise: take advantage of the certainty you have right now.

For businesses and the self-employed, stick with typical strategies like accelerating deductions into the current year and delaying recognition of income into next year.  For example, purchase staple items you know you will need next year to increase your expenses for this year. Defer sending invoices until January. Even individual taxpayers who itemize on Schedule A can pay next years’ property tax bill in December and max out contributions to your IRA.

Some energy-efficient deductions remain in 2011, but they are not the same as in prior years. This year’s deductions apply to permanent home improvements and not to purchased appliances.

As of right now, the Bush-era lower tax rates on capital gains are set to expire next year.  So if you’re considering cashing out on some good performing stocks that you’ve owned for more than a year, now would be a good time to take your gains rather than risking higher rates next year.  At the same time, sell your losers to offset you capital gains. 

December is a great time to make charitable contributions if you haven’t already.  Some financial planners are advising that this is a great year for gifting because there has been some talk about doing away with the $5 million lifetime gift exclusion. 

The motivation for the advice this year correlates almost exclusively to changes Congress may make in an effort to tackle the deficit.   That may mean higher tax rates and fewer deductions in the future.