Thanks to the extension late last year of the 2001 and 2003 tax cuts, the current federal income tax environment remains favorable. Now is a good time to take advantage of the low tax rates because we obviously can’t predict future tax rates. This article presents several tax planning ideas to consider this fall while you have time to think and plan before the holidays. Some of the ideas may apply to you, some to family members, and others to your business. Finally, don’t forget that AMT can impact your planning decisions.
Leverage the Standard Deduction by Bunching Deductible Expenditures
Are your 2011 itemized deductions likely to be just under, or just over, the standard deduction amount? If so, consider the strategy of bunching expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2011 standard deduction is $11,600 for married joint filers; $5,800 for single filers; and $8,500 for heads of households. Examples of deductible items that can be bunched every other year to lower your federal income taxes include charitable contributions, state income taxes, and property taxes payments.
Consider Deferring Income
It may also pay to defer some taxable income from this year into next year, especially if you expect to be in a lower tax bracket in 2012. For example, if you’re self-employed and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client or customer invoices. That way, you won’t receive payment for them until early 2012. You can also postpone taxable income by accelerating some deductible business expenditures into this year. Both moves will defer taxable income from this year until next year. Deferring income may also be helpful if you’re affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so forth). Be deferring income every other year you may be able to take more advantage of these breaks in those years.
Be Bold About Timing Investment Gains and Losses
As you evaluate investments held in your taxable brokerage accounts, consider the impact of selling appreciated securities this year. The maximum federal income tax rate on long-term capital gains realized from 2011 sales of securities held longer than a year is only 15%. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling. Biting the bullet and selling some loser securities (securities that are currently worth less than you paid for them) before year-end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less, which could otherwise be taxed at higher ordinary income tax rates. The bottom line is that you don’t have to worry about paying a higher tax rate on short-term gains if you have enough capital losses to shelter them.
If capital losses for this year exceed capital gains, you will have a net capital loss for 2011. You can use that net capital loss to shelter up to $3,000 or this year’s high-taxed ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you’re married and file separately). Any excess net capital loss is carried forward to next year.
Take Advantage of Generous but Temporary Business Tax Breaks
Several favorable business tax provisions have a limited shelf life that may dictate taking action between now and year-end. They include the following:
Bigger Section 179 Deduction
Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2011, the maximum Section 179 deduction is $500,000 (same as for tax years beginning in 2010). For tax years beginning in 2012, however, the maximum deduction is scheduled to drop back to $125,000.
Note: Watch out if your business is expected to have a tax loss for the year before considering any Section 179 deduction since you cannot claim a Section 179 write-off that would create or increase an overall business tax loss.
Section 179 Deduction for Real Estate
Real property improvement costs are generally ineligible for the Section 179 deduction privilege. However, an exception applies to tax years beginning in 2010 and 2011. Under the exception, your business can immediately deduct up to $250,000 of qualified improvement costs for the following types of real property under the Section 179 deduction privilege.
· Interiors of leased nonresidential buildings.
· Restaurant buildings.
· Interiors of retail buildings.
The $250,000 Section 179 allowance for real estate improvements is part of the overall $500,000 allowance. This temporary real estate break will not be available for tax years beginning after 2011 unless Congress extends it.
100% First-Year Bonus Depreciation
Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 100% of the cost of most new (not used) equipment and software placed in service by December 31, 2011. For a new passenger auto or light truck that’s used for business and subject to the luxury auto depreciation limitations, the 100% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 100% bonus depreciation break will expire at year-end unless Congress extends it.