Last Minute 2011 Year-End Tax Planning

Even at this late date in December, there are "last minute" steps that you can take to save income taxes.  The following bulleted list briefly describes a number of these steps.

1. Determine your 2011 and 2012 marginal income tax rates.  The marginal rate is the tax rate you would pay on the next one dollar of income.  If your 2011 marginal tax rate is lower than what you anticipate for 2012, then try to accelerate income into 2011 and defer deductions into 2012.  Do the reverse if your 2011 tax rate is higher than your 2012 rate.
2. Consider selling stocks for which you have capital losses in order to reduce the amount of your capital gains subject to tax.  Be careful to avoid the "wash sale" rule when reinvesting the sale proceeds.  The wash sale rule prohibits tax losses on the sale if the same security is purchased within the 30-day period before the date of sale and within the 30-day period after the date of sale.
3. Consider converting a portion of your traditional IRA or 401(k) account into a Roth IRA or Roth 401(k) account by December 30th.  The conversion is essentially a question of tax rates in the year of conversion vs. your tax rate in retirement.  If you are in the 15% bracket in 2011, convert enough to fill up the 15% rate bracket which extends to taxable income of $69,000 for joint filers and $34,500 for single filers.  Taxable income is your net income after all deductions and exemptions.  Before converting, be sure that you have enough cash outside the retirement account to pay the conversion tax.  This idea saves future taxes since the Roth account is tax-exempt.
4. For those age 70 1/2 or older, don't forget to receive the 2011 required minimum distribution from your IRA or qualified retirement plan.  Failure to take the RMD incurs a 50% penalty on the amount not taken.  Ending this year is the ability to make a direct charitable contribution from your IRA and have it count as part of your 2011 RMD.  Certain rules and limitations apply.
5. For those who would like to reduce their taxable estate, make a $13,000 present-interest gift to your heirs before the end of the year.  To be considered a completed gift in 2011, gifts made by check should be deposited in the bank by the recipient no later than December 30, 2011.  Each year there is a $13,000 "annual exclusion" from the gift tax.  It is a "use it or lose it" tax benefit.  For a married couple, the gift can be doubled to $26,000 if each spouse participates.

Big tax changes are on the horizon given the need to address the federal budget deficits, and because the so-called Bush tax cuts expire at the end of 2012.  The year 2013 could be the year for important tax changes.  We will keep an eye out on these changes and report on them in future blog posts.