Wipfli Alerts & Updates: Last Minute Strategies to Reduce, Delay, or Eliminate Taxes
December 7, 2011
(PDF 102 kB)
A new year, and an election year at that, will be upon us before we know it. With 2011 drawing to a close, now is the time to review your tax situation and evaluate strategies to minimize your tax bill. There is still time to take advantage of the many opportunities for you to significantly reduce, delay, or even eliminate your individual income taxes. Below are several recommendations for you to consider in your tax preparation.
- Provisions that are set to expire this year include:
- Payroll tax cut for employees and self-employed individuals
- Tax-free IRA distributions to charity
- Increased (to 100%) exclusion for sales of qualified small business stock
- Above-the-line deduction for higher education tuition costs
- Above-the-line deduction for certain out-of-pocket classroom expenses
- Deduction for state and local general sales taxes in lieu of state and local income taxes
- Mortgage premium insurance deduction
- Plug-in conversion credit for vehicles converted from standard to plug-in electric drive motor vehicles
- Residential energy property credit for qualified energy-efficient improvements and expenditures
- Increased AMT exemption amounts for individuals
- Nonrefundable tax credit offset of your entire regular and AMT tax liability
Additional provisions that Congress extended through 2012 include:
- Reduced marginal tax rates of 10, 15, 25, 28, 33, and 35 percent
- Lower rates of zero and 15 percent for capital gains, dividends, and certain property held for more than five years
- Marriage penalty relief for taxpayers filing joint returns
- Repeal of exemption and itemized deduction phase-outs
- Various education-related incentives including:
- Exclusion from income and employment taxes for employer-provided education assistance
- Exclusion from income for National Health Service Corps Scholarship and Armed Forces Scholarship programs
- Student loan interest deduction
- Coverdell Education Savings Accounts contribution limit and related provisions
- American Opportunity Tax Credit (AOTC)
- Amendments made to the child tax credit, including the increased credit amount of $1,000 per qualifying child
- Child and dependent care credit enhancements, including the increased maximum credit percentage of 35 percent, higher income limits, and increased maximum amount of qualifying expenses
- Increased maximum amount of the earned income tax credit and broader AGI phase-out ranges for taxpayers with three or more qualifying children
Wealth Transfer Opportunities
Take advantage of the favorable transfer tax laws that offer the ability to transfer significant wealth at either reduced or no tax cost. High-net-worth individuals can reduce or eliminate estate and gift tax exposure, with the unexpected two-year window containing larger transfer tax exemptions of $5,000,000 per person ($5,120,000 in 2012) that Congress provided. With no guarantee that Congress will retain the larger and more favorable exemptions (and tax rates), we recommend striking while the iron is hot and implementing some of the many available techniques that can save you and your family considerable wealth for generations. Our experienced Wealth Management professionals can answer any additional questions or help you regarding this area.
Retirement Contribution Opportunities
Various retirement plan contributions (e.g. 401(k) or 403(b)) may be made before year-end, and can reduce your taxable income. Other retirement plan contributions (e.g. IRAs and Roth IRAs) may be made by the due date of your tax return, not including extensions, and still count for 2012. An additional “catch up” contribution is allowed for certain retirement plans for an individual who is over age 50 by the end of the tax year.
Although Roth IRA contributions are not deductible because they are made after tax, their earnings are tax-free. Beginning in 2010, Roth IRAs were made available to all individuals, regardless of income amount or filing status, due to new Roth IRA conversion rules. This enhancement enables you to make nondeductible IRA contributions and periodically convert them into a Roth IRA. Remember, if you made a Roth IRA conversion in 2010 and chose to recognize the income ratably over two years, you must report half of the total amount in 2011 and 2012.
Wipfli can help you navigate the muddy tax planning waters to ensure that you receive the maximum benefit from all of the available opportunities before they close. Please call our office to discuss these and other ideas with you in greater detail to create a personal tax strategy customized to fit your needs.
As you know, tax planning is not limited to individual income or transfer taxes, but business taxes as well. Therefore, we have created a separate Wipfli Alert that will be sent soon for ideas on saving or eliminating taxes related to your business.
If you have any questions, or for more information, please contact Rick Taylor, Ryan Laughlin, or your Wipfli relationship executive.