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Maximize Tax Planning All Through the Year



There are many smart and easy steps which can be taken throughout the year that will potentially improve your financial situation. Incorporating tax planning into overall financial planning can help you reduce your tax bill. Opportunities should be planned in advance, along with consultation with advisors, in order to ascertain the most understanding and obtain maximum leverage. The last thing most taxpayers want to discover at tax-filing time, is that they still owe the IRS a large sum of money.

Assessing Your Tax Situation: During the year, time should be taken out to review annual financial transactions for items that may affect income taxes; such as selling real estate, buying a home, taking a distribution from an employer’s retirement plan and not rolling it over, or exercising of stock options, etc. Taxpayers should also be aware of the tax being withheld and/or paid during the year in order to determine if the amounts are adequate in order to avoid having to pay a large unexpected sum or penalties when the tax return is due.

Capital Gains and Losses: The federal long-term capital gains rate (15%) is much lower than the highest ordinary income rate (35%), therefore, holding on to investments until it is owned more than a year will help reduce tax on any gain.Capital losses are generally deductible in full against capital gains, and up to $3,000 annually ($1,500 if married filing separately) as an offset to ordinary income. Capital losses in excess of these limits can be carried forward for use in later tax years. Periodic analysis of portfolios to determine net long-term capital gain accumulation is recommended so that losses can be recognized as needed. It is generally, a good idea to offset larger capital gains with losses before year-end. When reviewing portfolios, taxpayers need to keep the “wash sale” rules in mind. The IRS has these rules in place to prevent taxpayers from selling securities to secure a tax loss in one year and then quickly repurchasing substantially identical securities. Securities sold at a loss and replaced by substantially identical securities within 30 days before or after the sale can potentially generate a non-deductible wash sale loss.

Income Timing: Depending on the transaction, certain income items can be delayed into a subsequent year. Along with the deferral of income, is the deferral of the related income taxes. Income deferral can help preserve certain tax breaks that are reduced at higher income levels or prevent application of higher tax brackets. Alternatively, accelerating income into an earlier tax year may also be a good option if higher tax brackets or income are expected the following year.

Deduction Timing: Like income, timing also can be important on the expense side of the tax picture. For those individuals who itemize deductions and are not subject to the alternative minimum tax (AMT), an acceleration of deductions can cut the current year’s tax bill. Examples of expenses to consider accelerating may include: paying certain deductible expenses early, such as state and local taxes, dues to professional organizations and periodical subscriptions (possibly in multiple-year increments). Those subject to the alternative minimum tax (AMT) will need to plan to defer expenses as such deductions are disallowed.

Fund Your Retirement: IRAs and 401(k)s are a great way to hang on to more of your money and leverage the available tax advantages. There are a number of approaches that can be beneficial depending on specific circumstances. Making pretax salary deferrals to a workplace retirement plan will trim taxable income. Plan participants should evaluate annual contributions and possibly consider increasing contributions prior to year-end. Cost of living (COLA) adjustments occur almost annually and should be evaluated by plan participants.

Tax Projections: The Alternative Minimum Tax (AMT) is a separate tax system that limits some deductions and does not permit others. It essentially is designed to ensure that taxpayers pay a minimum amount of tax by disallowing most deductions known as either preference or exclusion items. With careful planning, AMT can be minimized or controlled by proper timing of income and deductions.

Depreciation: In recent years, there have been very favorable tax depreciation rules for taxpayers placing business assets in service. Generally, the costs of assets with a useful life of more than one year must be depreciated over a period of years. Certain depreciation expense limitations may apply if more than 40% of the year’s asset purchases occur in the last quarter. Timing of acquisitions is important. The election under Section 179 to “expense” (deduct) the cost of qualifying assets in the year they are first placed in service remains available as another alternative to claiming accelerated regular depreciation deductions. While Section 179 is very generous by being available to both new and used assets, the expenses are limited to taxable income from active trades or businesses. Recent legislation expanded this provision, which may revert to lower annual limits in 2012. Additionally, last December’s 2010 Tax Relief Act significantly enhanced bonus depreciation by temporarily increasing this additional first-year depreciation allowance to 100% for qualified assets placed into service from September 9, 2010 through December 31, 2011 (proposals by the President are in discussion to expand this provision). If not extended, then assets placed in service in 2012 will be allowed a 50% bonus depreciation. Taxpayers considering acquiring new business assets should consider acquisitions prior to year end 2011. Keep in mind that unlike Section 179, the 100% bonus depreciation applies only to new assets.




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