Taxpayers should also plan ahead for long-awaited tax changes that may occur in 2013. Under current tax law, all the tax rates will change for 2013. There's been various proposals to keep the tax rates the same or increase only the top two tax brackets. But so far those proposals have not passed into law. Accordingly, people may want to plan out their 2011 and especially their 2012 taxes with an eye towards the presumably higher tax rates that might go into effect in 2011. And this means that several traditional tax planning techniques need to be reversed. For example people may want to accelerate income into 2011 and 2012 in an attempt to lock in a known tax rate now instead of an uncertain or possibly higher tax rate in 2013. Similarly people may want to defer any tax deductions until 2013 so those deductions will offset future income at presumably higher rates, thereby squeezing extra tax dollars out of a deductible expense.
Income Deferral Strategies
- Ask your employer to pay out any bonuses in January 2012 instead of in December 2011.
- Hold off on selling stocks and other investments with taxable gains until next year.
- Hold off on taking distributions from an IRA or other retirement account until January.
Income Acceleration Strategies
- Ask your employer to pay out bonuses in 2011 instead of next year.
- Sell off stocks and other investments with taxable gains in 2011 instead of next year to absorb capital loss carryovers or to lock-in gains at the 15% rate.
- Accelerate IRA distributions in 2011 and 2012 to avoid potentially higher tax rates starting in 2013.
- Convert pre-tax retirement savings to a Roth account to lock-in a known tax liability.
Deduction Acceleration Strategies
- Pay tax deductible expenses in 2011 instead of 2012, such as medical bills, charity donations and property tax.
- Sell off stocks and other investments that have lost value so you can take the losses on your 2011 return.
- Increase your 401(k) or IRA contributions.
Deduction Deferral Strategies
- Defer paying medical bills, charity donations, property tax and other deductions until next year.
- Consider funding a Roth IRA instead of a tax-deductible traditional IRA. By forgoing the deduction, you'll be locking in a known tax rate on your contribution in return for tax-free investment returns.
AMT Tax Planning
People who are or might be impacted by the alternative minimum tax have additional considerations to think about. The AMT eliminates or reduces the federal tax savings for medical expenses, state and local taxes, and miscellaneous itemized deductions. The suggestion here is to pay those expenses when they are due instead of trying to accelerate or defer them. For example, instead of prepaying the next installment of your property tax, wait until the actual due date to pay that since property tax is an adjustment for the AMT calculations. Similarly, anyone impacted by the AMT should sell any incentive stock options that they exercised during the 2011 calendar year since the value of an exercised but unsold ISO is added to your income for calculating the AMT.When planning for the AMT, taxpayers should be aware that the AMT could pose a bigger problem in 2012 than in 2011, as the exemption amounts for 2012 are expected to be dramatically lower in 2012, which will in turn create larger alternative minimum tax liabilities.
Tax Planning Tips Specific to 2011 Only
There are several tax breaks that expire at the end of 2011. The advice here is to take the tax break while you can. Some notable examples:- Classroom expense deduction expires at end of 2011. Teachers can deduct up to $250 for books, supplies and other expenses related to their classroom.
- Mortgage insurance premiums can be deducted in 2011, but this is scheduled to be the last year of this deduction.
- Sales tax deduction will also end in 2011. This is an optional itemized deduction that can be taken instead of the deduction for state and local income taxes paid.
- Tuition deduction expires at the end of 2011. Up to $4,000 in tuition can be deducted, and amounts paid in 2011 for classes starting in early 2012 can qualify for a deduction on your 2011 tax return.
