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Year-End Tax Planning Strategies for Individuals

By MarksNelson on December 3, 2011 in Articles, Tax

Before you know it, the busy holiday season will be here. With the end of 2011 approaching, it’s time to consider using some strategies that will lower this year’s tax bill.

Of course, you don’t want to make moves to increase your 2012 tax bill by more than you would save this year. In this regard, the key question is: Will you make as much or more money next year? The answer will determine your 2012 marginal federal income tax bracket, which you need to know to do the best job planning for the rest of this year. (Tax bracket tables are at the end of this article).

With these factors in mind, here are some year-end tax planning ideas to consider.

Pre-Pay Deductible Expenditures if You Itemize

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2011 write-offs makes sense if you expect to be in the same or lower tax bracket next year. See the table at the end of this article for the 2012 federal income tax brackets that will apply, assuming Congress does not make any changes.

Perhaps the easiest deductible expense to pre-pay is included in the house payment due on January 1. Accelerating that payment into this year will give you 13 months of deductible interest in 2011. You can pull the same pre-payment strategy with a vacation home. If you prepay this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll have only 11 month’s worth of interest in the first year you stop.

Next up on the pre-payment menu are state and local income and property taxes that are not actually due until early next year.

Also, consider prepaying expenses that are subject to limits based on your adjusted gross income (AGI). The two prime candidates are medical expenses and miscellaneous itemized deductions that you have not been reimbursed for by an insurance company, employer, or other third parties.

  • Medical costs are deductible only to the extent they exceed 7.5 percent of AGI.
  • Miscellaneous deductions count only to the extent they exceed 2 percent of AGI. They include investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses.

If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the AGI hurdles and getting some helpful write-offs. Otherwise, you lose out.

Alternative Minimum Tax Liability Has Implications

Warning: The pre-payment strategy may be a bad idea if you know you’ll owe the dreaded alternative minimum tax (AMT) for this year. The reason is that under the AMT rules:

  • Write-offs for state and local income and property taxes are completely disallowed;
  • Medical expenses must exceed 10 percent of AGI to be deductible; and
  • No miscellaneous itemized deductions are allowed.

Therefore, prepaying these expenses may provide little or no tax-saving benefit for AMT victims. 

Deduct Sales Taxes on Major Year-End Purchases If You Itemize

If you live in a state with low or no personal income taxes, you can deduct general state and local sales taxes through 2011. (Congress extended this tax break for another year.) Therefore, you have the option of deducting either state and local sales taxes or state and local income taxes on your 2011 return — but not both.

Most taxpayers have to use IRS-provided tables to calculate their sales tax deduction because they don’t save receipts. However, if you’ve hoarded receipts from your 2011 purchases, you can add up the actual sales tax amounts and deduct the total if that gives you a better result than the IRS tables.

Even if you’re forced to use the IRS table, you can still deduct actual sales taxes from high-priced 2011 purchases of vehicles and boats on top of the pre-determined IRS-table amount. So buying a car or boat between now and December 31 could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

Warning: The sales tax write-off only helps if you itemize. And if you’re hit with the AMT, you’ll lose some or all of the taxsaving benefit.

 Pre-Pay College Tuition

If your 2011 adjusted gross income (AGI) allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider pre-paying college tuition bills that are not due until early 2012 if that would result in a bigger credit on this year’s tax return. Specifically, you can claim a 2011 credit based on pre-paying tuition for academic periods that begin in January through March of next year.

If your 2011 AGI is too high to be eligible for the Lifetime credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider pre-paying tuition bills that are not due until early 2012 if that would result in a bigger deduction on this year’s tax return. As with the credits, your 2011 deduction can be based on pre-paying tuition for academic periods that begin in the first three months of 2012.

Game the Standard Deduction

If your total annual itemized deductions are usually close to the standard deduction amount, consider the strategy of bunching together expenditures for itemized deduction items every other year. Itemize in those years to deduct more than the standard deduction figure. Then, claim the standard deduction in the intervening years.

Over time, this drill can save hundreds or even thousands in taxes by increasing your cumulative write-offs. That’s because you’ll bag higher itemized deductions in alternating years and relatively generous standard deductions in the other years. So regardless of what happens with tax rates, you’ll come out ahead.

2012 Federal Tax Figures (Assuming Congress Does Not Make Changes)

2012 Fedaral Tax Figures. Income tax rate brackets.

About the Author

MarksNelsonView all posts by MarksNelson
MarksNelson LLC works with clients to help safeguard and grow their businesses. Our ultimate goal is to help our clients to Move Forward. The firm provides Assurance, Accounting Services and Business Advisory, Business Valuation, Consulting, Cost Segregation, Employee Benefit Plan Audits, Litigation Support, Forensic Accounting, International Tax, State and Local Tax and Tax planning, advisory and compliance services. MarksNelson is a member of The Leading Edge Alliance, the second-largest international professional association of independently owned accounting and consulting firms, serving clients who need additional resources on a national or international level. MarksNelson has significant accounting and business advisory experience in the auto dealership, construction, insurance, manufacturing, distribution and real estate sectors. The firm was named among the 2014 Best Accounting Firms for Leadership Equity by the 2014 Accounting MOVE Project for its dedication to gender equity.


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