By Mark Buescher, C.P.A.
As 2011 winds down here in Madison, there’s less uncertainty about the short-term outlook for tax law than we had at the end of last year. With this temporary clarity comes the opportunity to create a sound tax-saving plan – and the time to put your plan into action. Here are several strategies to consider.
Reap tax benefits with retirements savings
When it comes to retirement saving, I always stress to our clients to contribute the maximum amount allowed every year.
For 2011, the IRA contribution limit is $5,000, and those 50 and older can contribute $6,000. Participants in a 401(k) plan can contribute as much as $16,500 ($22,000 if 50 or older).
Did you know you can make IRA contributions for your spouse when you’re working and your spouse is not? For 2011, the maximum spousal IRA contribution is the lesser of $5,000 or your combined earned income. You can add an additional $1,000 when your spouse is over age 50.
If you’re self-employed, establishing a retirement plan such as a SEP or a SIMPLE means a current-year tax deduction in addition to tax-deferred growth. For 2011, you can contribute 25% of your salary to a SEP plan, up to a maximum contribution of $49,000. The maximum SIMPLE contribution is $11,500, plus an additional $2,500 as a catch-up contribution if you’re over age 50. A federal tax credit may also be available – up to $500 for each of the first three years of your new plan. Remember, credits reduce your tax bill dollar for dollar.
Reduce AGI to qualify for tax breaks
Reducing your adjusted gross income could increase eligibility for income-limited deductions and credits.
The standard deduction for 2011 is $11,600 when you’re married filing jointly ($5,800 when you’re single). When your itemized deductions; that is, expenses you pay for medical care, mortgage interest, taxes , charitable contributions, casualty losses, and miscellaneous deductions, are close to that amount, advance payments could save you tax dollars. For example, you can choose to make your property tax payment here in Madison County in December instead of January. Since itemized deductions are no longer limited by your income, timing the payment of expenses might be more beneficial than you expect.
There’s another reason to double-check deductions: your alternative minimum tax (AMT) exposure. Certain expenses, including state taxes and medical costs, are reduced or eliminated under AMT rules. The AMT calculation also eliminates the standard deduction. In some cases, you may save money if you claim itemized deductions even if they total less than your standard deduction.
Review support provided for relatives
While planning to maximize deductions, remember to take into account the financial support you provide for relatives. Potential tax breaks include dependency exemptions, head-of-household filing status, medical deductions, and the dependent care tax credit. Generally, you’ll need to provide over half of your relative’s living expenses.
What if you don’t provide more than 50% of support for you family relative? You could enter into an arrangement with other family members who provide help, or you could shift assets you would dispose of anyway to pay for the support. You would then be shifting the related income and tax to your relative.
Here’s an illustration of assets and income shifting. Instead of selling stock at a gain and using the proceeds to pay for a parent’s living expenses, gift the stock to your parent and let him or her make the sale. Long-term gains could qualify for a zero-percent tax rate if your parent is in the lower tax brackets.
Assess equipment needs for your business
For business owners here in Madison, this year offers what may be a last-chance opportunity for an enhanced deduction: 100% bonus depreciation is scheduled to expire December 31. The increased Section 179 expensing of up to $500,000 is also slated to shrink after the end of the year.
Synchronize these two tax benefits with your asset purchase plan before year-end to make the most of 2011 deductions. For instance, you can apply the Section 179 deduction to used property, while bonus depreciation is available only for new assets you buy and place in service in 2011.
Choose strategies that fit your situation
Other strategies for reducing your 2011 federal income tax bill include maximizing losses by increasing your participation in passive activities, taking steps to write off worthless securities and bad debts, and harvesting capital losses.
Be aware that Congress might pass legislation before year-end that would require adjustments to your tax plan.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.