Good year for gifting
But there is some uncertainty around estate planning, Duggan said. Here’s why: When the congressional supercommittee in November was working to cut the government’s deficit, rumors swirled that the committee would slash the current $5 million lifetime gift-tax exclusion, currently in place through 2012. While the supercommittee failed to come to agreement, the possibility lingers that lawmakers might tinker with that exemption in 2012. That means high-net-worth taxpayers who haven’t yet devised estate plans to maximize that benefit should act sooner rather than later.
“I am recommending to clients, to the extent their intent is to use the provision anyway, it may be prudent to use it this year versus next year,” Duggan said. “We at least have certainty this year.”
It’s not too late to give cash or property this year, though the giver must provide the IRS with a formal appraisal of the property, he said. “We have plenty of clients who review the assets with an appraiser,” even though the documents don’t come until January.
Traditional year-end planning generally means bunching your deductions into the current year — paying next year’s property-tax bill in December, for instance — and pushing income into the following year, if possible. Basically, do what you can to reduce your current-year tax hit.
Business owners, too, should consider maximizing deductions. “Take an inventory of what you expect to purchase in the first couple months of the following year,” Duggan said. “If you know with relative certainty what those purchases might be, there’s nothing wrong with prepaying them in December.”
Alternatively, he said, “If the owner has the ability to defer billings for a month, that’s another way to reduce income in the current year.”
Whether a business owner or employee, another way to make the most of tax breaks at year-end: Try to max out contributions to your retirement plan. And consider a Roth IRA, said Allison Shipley, a principal with PricewaterhouseCooper’s private company practice.
Starting in 2010, the income limits were removed on Roth conversions. Now anybody can elect to convert a pre-tax IRA to a Roth IRA. “We’ve found generally that converting to a Roth makes a lot of sense if you don’t think you’re going to need the money during your lifetime and you intend to leave it to your heirs,” Shipley said.
Even those who will need the money in their lifetime might consider a Roth, if only because income-tax rates may be higher when they retire. Roth IRA may be in your future
A Roth IRA “can provide you some tax-free income later on,” said Tim Courtney, chief investment officer with Burns Advisory Group in Oklahoma City, Okla.
You must pay ordinary income tax on the money you convert. But doing that this year or next makes sense, given that tax rates are slated to rise when the Bush-era cuts expire at the end of 2012.
A valuable tax perk that lets people age 70 1/2 or older donate from their traditional IRA to a charity ends this month, unless Congress opts to extend it. Eligible taxpayers can donate up to $100,000 without recognizing that distribution as income. And that money still counts as a required minimum distribution from the IRA. The donation is not tax-deductible, however.
If you’re not eligible for that perk, now is still a good time to donate — not only does it help the charity at a crucial time of year, but it also lets itemizers ramp up the value of their deductions.
Also, if you make certain energy-efficient home improvements, you might be able to claim a tax credit for part of the cost. But hurry: those credits end this year. Go green before tax credits expire
And teachers, this may be your last chance to take advantage of the above-the-line deduction for school supplies: you can deduct up to $250 for out-of-pocket costs, but that tax perk is set to expire, too, unless Congress intervenes.
Another way to give: Donate to your favorite charity stock that has gained in value since you purchased it (and that you’ve held more than a year). That way you avoid capital-gains tax on the increase in value, and generally you can claim a charitable-contribution deduction for the fair-market value of the stock on the day you donate it.
If you want to donate shares that have lost value, sell them first so you can claim the tax loss, and then donate the money.
Even if you don’t plan to donate the proceeds, don’t forget to make the most of your stock losses. Think of them as a tax asset, Courtney said.
Losses are like “a get-out-of-jail-free card for the future,” Courtney said. You can offset your capital gains, and up to $3,000 in ordinary income, plus carry additional losses forward to future years.
Say you own a stock that’s taken off, and you want to rebalance. “A lot of people say, ‘I need to rebalance and get back to my original allocation, but I can’t because if I sell it I’m going to have this huge taxable gain, but if you booked your losses earlier when the market was down, you’d have a loss carry-forward that you can use to offset that gain,” he said.
Don’t forget to mind the wash-sale rule: If you exit an asset, wait 30 days before re-investing in the same stock, or you lose your ability to harvest the losses. Consider investing in a similar investment. “It just can’t be the exact same investment,” Courtney said.
The alternative minimum tax turns traditional year-end strategies on their head, for the most part, since many deductions are unavailable to taxpayers who fall into this parallel tax.
“If I have a client who is going to be in AMT in 2011, for example, and they haven’t paid their property taxes yet and they have the ability to defer the payment to 2012, it might be good to defer,” Shipley said. Otherwise, they lose the benefit of that deduction. “If they defer making that payment until 2012, they might not be in AMT next year.”
And that traditional year-end strategy, for those not in the AMT? Keep in mind that may not be a smart move come year-end 2012. At the end of that year, the Bush-era income-tax rates and lower rates on capital gains are set to expire.
If you think Congress will let the tax code revert to higher rates, you’ll want to pull income into 2012, from 2013, and push deductions out, as much as possible. Of course, that’s still a big “if.”