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As the end of the year approaches, it is a good time to consider actions that may lower your tax bill this year and possibly next year. High-income earners should consider that top income tax and capital gains tax rates are scheduled to increase after 2012, and Congress could raise taxes during 2012, which could make acceleration of dividends and capital gains to 2011 appealing.
Low interest rates continue to provide taxpayers with unique opportunities to transfer wealth and reduce gift, estate, and generation-skipping transfer taxes. Clients can shift future appreciation of assets to younger generations using such techniques as: grantor retained annuity trusts (“GRATs”), low interest loans to family members, installment sales to grantor trusts, charitable lead trusts, and family limited partnerships.
The following are examples of actions based on current tax rules that may also reduce taxes, if you act before year end:
- Make health savings account (“HSA”) contributions this year up to $6,150 for a family (you can make a full year’s worth of deductible HSA contributions for 2011 even if you became eligible in December 2011).
- Realize losses on stock (and if you want to substantially preserve your investment position, you can consider buying it back more than 30 days later).
- Increase your basis in a partnership or S corporation if necessary to allow you to deduct a loss from it for this year.
- Accelerate big ticket purchases (such as a car or appliances) into 2011 to ensure a deduction for sales taxes on the purchases (if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction).
- Pay contested taxes to be able to deduct them this year while continuing to contest them next year (weighing tax planning with litigation strategy of paying the contested taxes).
- Settle an insurance or damage claim to maximize any casualty loss deduction this year.
- Self-employed individuals should consider creating a self-employed retirement plan.
- Businesses can make expenditures that qualify for the business property expensing option (up to $500,000 for assets bought and placed in service this year); the maximum expensing amount could drop as low as $25,000 for assets bought and placed in service next year.
- Businesses are also allowed a first-year depreciation deduction equal to 100 percent of the adjusted basis of the property available for qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012. This bonus depreciation is scheduled to drop to 50 percent for property placed in service in 2012.
- If you are at least 70½ and required to take a minimum distribution from an IRA before year end, you can direct your IRA trustee to distribute up to $100,000 from your IRA directly to a qualified charity without incurring income tax on the amount. The amount passing to charity is not includable in your income (up to the $100,000 limitation), but that amount is not allowed as a separate charitable deduction.
- Consider deferring a debt-cancellation event until 2012, electing to deduct investment interest against capital gains, and disposing of interests in passive activities to allow a deduction for suspended losses.
- Consider gifts to family members to take advantage of the annual gift tax exclusion; you may make a tax-free gift of up to $13,000 per recipient in 2011 and 2012 (a husband and wife can give up to $26,000 per recipient), but unused amounts do not carry over to future years.
- Be sure to consider the alternative minimum tax (“AMT”) in any planning you implement to determine whether deductions otherwise available are reduced or eliminated under the AMT.
- Eliminate or reduce a penalty for underpayment of estimated federal tax by increasing withholding for 2012.
The gift, estate, and generation-skipping tax exemptions are currently set at $5 million, and will increase to $5.12 million in 2012. Exemption amounts are scheduled to return to their pre-2001 level of $1 million in 2013. The current top rate for gift, estate, and generation-skipping transfer taxes is 35 percent; unless Congress acts, these rates will return to their pre-2001 rates in 2013, with a maximum rate of 55 percent.
The strategies discussed above are not suited to every situation. If you have questions about any of the planning strategies discussed above, please do not hesitate to call any member of our group listed below to discuss how any of these strategies would affect your particular situation. You may also view the alert in the PDF linked below.
PDF - Tax_Planning_for_a_Happy_Holiday.pdf
To ensure compliance with requirements imposed by U.S. Treasury Regulations, Haynes and Boone, LLP informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
*Board Certified – Estate Planning and Probate Law and Tax Law by the Texas Board of Legal Specialization.