Fri, October 07, 2011
Six Year-end Tax Ideas for 2011
It’s unclear whether significant tax reforms will be enacted for 2012, so year-end planning could be tricky this year. Still, there are some tax strategies that should at least be examined for possible implementation before 2011 ends.
Flexible Spending Accounts
If your FSA withholdings were too low this year, set aside more for 2012 if you can, but keep in mind that the IRS will no longer allow you to get tax-free reimbursements for over-the-counter drugs.
Health Savings Accounts
If you become eligible to open a health savings account (HSA) in December this year, you’re allowed to make a full year’s worth of deductible contributions for 2011.
Accelerate deductions, but watch out for the AMT
The Alternative Minimum Tax (AMT) exemption amounts for 2011 are $48,450 (single taxpayers ) and $74,450 (married filing jointly). Often, it can be desirable to accelerate deductible expenses into the current year to reduce your tax liability, especially if doing so moves you into a lower tax bracket. But if the acceleration of some deductions into 2011 would cause you to pay more tax under AMT, you may not wish to accelerate them. So check to see if you’re in the AMT ballpark and keep that in mind as you consider possible deductions. Remember that a number of expenses that are deductible under regular taxes are disallowed under AMT. Among these are the deduction for state property taxes on your residence, miscellaneous itemized deductions, and personal exemption deductions.
Similarly, if it looks as though you’ll owe state or local income taxes when you file your 2011 return, consider having your employer increase your withholding for those taxes, or pay estimated taxes to make those deductions available to your Federal return for 2011 – but remember that these deductions are disallowed if you’re hit by the AMT.
Reverse a Roth Conversion
If you converted funds from a traditional IRA to a Roth earlier this year, the assets in the new account may have declined significantly since the conversion. If so, you might find that it doesn’t make sense to pay taxes on the income created by the original conversion. You can undo the original Roth conversion by recharacterizing it: transferring all the converted funds, including earnings or losses, from the Roth back to a traditional IRA via a trustee-to-trustee transfer.
Maximize Higher Education Expense Deductions
Under current law, the above-the-line deduction for qualified higher education expenses will expire after this year. Congress might extend it, but it might not. If you know you’ll have such expenses in the first three months of 2012, consider prepaying eligible expenses if doing so will allow you to maximize the deduction.
Map out an MRD Strategy
Individuals who’ve reached age 70.5 must generally take required minimum distributions (RMDs) from IRAs, 401(k)s, or similar employer-sponsored retired plans. If you turned age 70-1/2 in 2011, you’re permitted to delay your first RMD distribution to 2012 (by withdrawing both the 2011 and 2012 RMDs next year). Give some thought to how you should do this: pushing the extra income into 2012 might be undesirable if it pushes you into a higher tax bracket, or one that causes you to lose some deductions. On the other hand, if you’re expecting to be in a much lower tax bracket next year, pushing the 2011 RMD into next year might be a good strategy.
Even if no major tax legislation is passed this year, Congress still has a number of issues to address in the near future: finally fixing the AMT, or at least patching it for 2012; dealing with the expiration of estate and gift tax rules; figuring out what to do after the Bush-era tax cuts expire after 2012. Some of these matters may be addressed in the context of dealing with the long-term deficit, but that remains to be seen.
Remember: Any specific advice given here may or may not be appropriate for your particular situation. As always, tax strategies should be discussed with a qualified tax adviser before doing something that you can’t undo.