Our tax system for the most part remains firmly based upon the calendar year. At year-end, it’s time to take a snapshot of your income, deductions and credits. Based on that data, your tax liability for the year can be computed. If year-end strategies are implemented before your tax liability is “set in stone” it can make a significant difference in what you owe for the tax year. Tax planning for year-end 2011 should use traditional year-end strategies as well as those that react to situations unique to this year.

Income/Deduction Shifting

The traditional year-end strategy of income shifting applies to 2011, but with an extra twist. Under traditional strategy, you time your income and deductions so that your taxable income is about even for 2011 and 2012 so your tax bracket does not spike in either year. If you anticipate a higher tax bracket for 2012, you may want to accelerate income into 2011 and defer deductions into 2012. If you anticipate a leaner 2012, income might be delayed through deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions and delaying year-end billings.

The twist for year-end 2011 is the uncertain future for the tax rates after 2012. Many political observers forecast that higher-income taxpayers will be asked to pay more, either through higher tax rates or more limited deductions. That may suggest a strategy in which income is not defer-red but is recognized now at lower tax rates still available in 2011 and 2012.

Roth Conversions

If you converted an Individual Retirement Account (IRA) to a Roth IRA in 2010, you were given an option - recognize all income in 2010 or defer that income, half into 2011 and half into 2012. If you elected to defer that income into 2011 and 2012, do not forget to figure that income into your year-end planning.

Life Changes

Marriage, divorce, the birth of a child, death, a change in job or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. After December 31, 2011, it will be too late to alter most of your bottom-line tax liability for 2011.

Tax Extenders

A number of tax extenders are scheduled to expire after December 31, 2011. They include:

  • the state and local sales tax deduction
  • the higher education tuition
  • the teacher’s classroom expense deduction

Seniors age 70 ½ and older should also consider making a charitable contribution directly from their IRAs up to $100,000 and paying no tax on the distribution. This tax break, especially advantageous to those who do not itemize deductions, is scheduled to end for distributions made in tax years beginning after December 31, 2011.

For more information, call Tamilyn Masuda at 847-4422 or visit www.masudacpa.com.