Merry Christmas and Happy Holidays!
You have a few days left to do some year-end tax planning that could give you an advantage when you prepare returns after the new year.
Here are the top 10 tips from the Ohio Society of CPAs, with some gathered from other sources, too. The society offers daily tips through Dec. 31 online at www.financialfitnessohio.com
(1) Location, location, location: Keep tax documents in one place so you don’t waste time searching for items to work on returns.
(2) Claim the last of the residential energy credit: Install the right energy efficient property in your home, such as insulation, doors and windows to qualify for a federal tax credit of up to $500. That’s the aggregate total credit you can claim, including amounts you claimed in prior years. The credit expires Saturday. Go online to www.irs.gov or www.ase.org for the Alliance to Save Energy for details.
The Alliance to Save Energy points out that the tax credit applies to improvements “placed in service” through Saturday. The IRS defines “placed in service” as when items are installed and ready for use and not the time of purchase.
It’s not enough to put the order in for a new door or window by Dec. 31 — you’ve got to install it, too. The tax credit applies to how much you paid for the improvement, excluding labor for building components such as windows, doors and insulation — but including labor for HVAC components such as air conditioners, heat pumps and water heaters.
(3) Consider prepaying first semester 2012 college tuition: Expenses paid for you, your spouse or your dependents will count on your 2011 return if you qualify for education tax credits. Breaks include the American Opportunity Credit, which can reduce your tax bill by up to $2,500 and is partially refundable.
(4) Individual Retirement Accounts: You can make contributions to an IRA for your spouse when you’re working and your spouse is not. For 2011, the maximum spousal IRA contribution is the lesser of $5,000 or your combined earned income. You can add an additional $1,000 when your spouse is over age 50.
(5) Charity: During 2011, you can make a qualified charitable distribution from your traditional IRA of up to $100,000. The donation counts toward your required distribution, yet has no effect on your adjusted gross income. Seniors age 70½ and older should consider making a charitable contribution directly from their IRAs up to $100,000 in order to avoid taking the distribution into taxable income and pay no tax on the distribution. This tax break, especially helpful to those who do not itemize deductions, is scheduled to end for distributions made in tax years beginning after Saturday.
For charitable donations of household goods and clothes, the IRS notes items must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal with the return. Household items include furniture, furnishings, electronics, appliances and linens.
For monetary donations, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. The bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
Contributions are deductible in the year made. Donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011, the IRS says.
(6) Roth conversion: A potential tax-reducing suggestion: Transfer investments from your traditional IRA to a Roth IRA during a market dip for growth without owing additional tax. Ask a CPA or tax advisor to explore the potential tax implications of a conversion.
(7) Charity documentation: Get the documentation you’ll need for all your 2011 charitable contributions, or you risk losing your deduction. Even gifts under $250 require a bank record or a receipt from a qualifying charity. Check IRS guidelines to determine if an organization is a qualifying charity before you make your contribution.
(8) Accelerate deductions, defer income: Why pay tax now when you can pay tomorrow? Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you might be able to accelerate state and local income taxes, interest payments and real estate taxes. But beware of the Alternative Minimum Tax (AMT), which can affect timing strategies.
(9) Beware of the Alternative Minimum Tax: The pre-payment strategy could be a bad idea if you know you’ll owe the AMT this year. Under AMT rules, write-offs for state and local income and property taxes are disallowed, medical expenses must exceed 10 percent of adjusted gross income to be deductible and no miscellaneous itemized deductions are allowed. Therefore, prepaying these expenses might provide little or no tax-saving benefit for those subject to the AMT.
(10) Deduct sales taxes on major year-end purchases if you itemize: Even if you’re forced to use the IRS table, you can still deduct actual sales taxes from 2011 purchases of vehicles and boats on top of the pre-determined IRS-table amount. So buying a car or boat between now and Saturday could give you a bigger sales tax deduction and cut this year’s federal income tax bill. However, 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 tax-saving benefit.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com. Follow her on Twitter at www.twitter.com/blinfisher and see all her stories at www.ohio.com/betty.
