The Queens/Brooklyn Chapter of the New York State Society of Certified Public Accountants (NYSSCPA) recommends these Year-end Tax Tips for consumers:
1. Get Organized: Put your tax data together now. Round up receipts and cancelled checks from charities; check your latest brokerage statement for year-to-date gains or losses; make a checklist of accounts to keep track of the 1099s when they arrive; and get medical receipts and insurance reimbursement forms in order. Start organizing your files now, to avoid the last-minute rush. It is much easier to get replacements when you have the time instead of finding out at the last minute that you’re missing some item that prevents you from finishing your tax return.
2. Create a Tax Projection: Before the stroke of midnight on December 31, visit with your CPA to ask about year-end tax planning moves. By having a tax projection prepared, you will have several options for minimizing your taxes. If you expect income tax rates to rise in 2011 and your income for that year to approximate what it was in 2010, it may pay to accelerate income into 2010 and defer deductions to 2011. This is a matter to be discussed with your CPA.
3. Review Your Income and Deductions: The most fundamental year-end tax saver is to adjust the timing of income and deductions. As indicated in Point 2, if you anticipate income tax rates to increase in 2011, it may be beneficial to accelerate income into 2010 and defer deductions into 2011 in order to save the taxes on income and have the deferred deductions save you taxes in 2011 when the rates are higher. In using this strategy, it should be noted that different itemized deductions are subject to different phase-out limits for regular tax purposes as it relates to the AMT (Alternative Minimum Tax).
4. Postpone Income: If you’re in line for a bonus, you may want to see if your employer will hold off writing the check until January. If you own a cash-basis business, you can time the receipt of income (defer receipt until January) by waiting near the end of the year to send your December billings. You can’t simply defer taxes by not depositing checks received in the bank. Caveat: If you expect to be subject to the AMT, consider accelerating income to the current year in an effort to mitigate the negative aspects of this tax. Also, should tax rates go up for 2011, depending on whether your tax bracket is affected or not, you may want to accelerate income into the current 2010 tax year to save overall tax dollars. Additionally refer to Points 2 and 3 before deciding to defer income to next year.
5. Fund Your Retirement: Contribute to a deductible Individual Retirement Account (IRA) if you qualify. The investments grow tax deferred if it is a conventional IRA; tax-free if it is a “Roth” IRA which has significant other advantages. The contributions to a Roth IRA, however, are not deductible. You have until April 15 to open an IRA and make a deductible contribution for the prior year. If you have a 401K plan at work, make as large a contribution as you’re allowed (and able) and can afford. The self-employed have alternative retirement plans to consider, but some of them must be opened by Dec. 31. This money can grow to a substantial sum because it is compounded, over time, tax free. To maximize the growth of your annual IRA contribution, always make it at the beginning of the year. Remember that there are different maximum amounts to be contributed depending on whether you are over 50 years old.
In 2010 there is a special provision allowing individuals to convert traditional IRAs to Roth IRAs regardless of the person’s income. This will provide a significant future benefit for many individuals who take advantage of this election prior to Dec. 31, 2010. However, the conversion will be a taxable event. Weighing the advantages and disadvantages is a very complex task requiring professional assistance.
6. Pay Deductible Expenses before December 31: Paying your state income tax estimate before Dec. 31 accelerates your federal deduction. You can also pay property taxes early, make an extra mortgage payment (the interest portion is deductible), pay your tax preparer for your year-end planning meetings or opt to have dental work or elective (deductible) surgery before the end of the year. Using a credit card is the same as using cash—the deduction is taken in the year the charge is incurred (rather than the year you pay off the credit card balance). CAVEATS: If you are in the AMT for 2010 you should consider making the final estimated tax payment of state and local income tax in 2011 instead of doing so by Dec. 31, 2010. Also refer to Points 2 and 3. Should tax rates increase for 2011 and your tax bracket is affected you may want to defer expenses from the current tax year to next year in order to save overall tax dollars.
7. Contribute to Charity: You can make cash contributions or charge them on your credit card and take a current deduction. If you give appreciated property to charity, in many cases, you’ll get to deduct the full-market value. You may need an appraisal to determine the value of some property. If you pay for the appraisal or any other ancillary costs in connection with the transfer of appreciated property to a charity, such costs can be added to the contributed amount that is reported. You must maintain adequate records for all cash contributions. This means retaining receipts from the charity; the cancelled check or a bank copy of the cancelled check; or a bank statement containing the name of the charity, the date, and the amount. If you receive a written acknowledgment from the charity the communication should reflect the name of the charity and include the date of the contribution, the amount and whether you received any personal benefit from the contribution. The amount of the personal portion should be disclosed so that the contribution would be limited to the excess of the payment over the personal benefit.
8. Consider Gifts to Children: If you intend to make gifts to children (or other relatives), do it well before Dec. 31 so that the checks clear. Gifts up to $13,000 per person need not be reported. This annual gift exclusion for the year 2011 will be indexed and at the time of this writing is unknown. However, if you have not made any gifts in 2010, consider making a gift of $13,000 at the end of 2010, and follow it up with another gift in January 2011 (for the amount of the annual exclusion that will be in effect for that year). Such planning will permit the done to benefit by investing both amounts at the beginning of 2011 and earn income on the principal for the entire year.
Don’t feel comfortable giving away $13,000 to a child? Consider a “529” education plan that allows you to put away money for a child’s college education, get some benefit on your New York State income tax return and not give up control over the money. This is not the same as an outright gift but you’ll still get some tax advantages and provide for the future education of a loved one.
9. Offset Capital Gains: Review your investment portfolio to determine whether you should sell some “losers” before year-end in order to offset capital gains you’ve already realized. Capital losses are first netted with capital gains, and then are deductible against ordinary income (limited to $3,000 a year). You should consider recognizing gains that might not be taxed because there is a loss that can offset it. In that way, you can immediately buy back the stock (there is no 30-day waiting period for stocks sold at a gain). If you expect capital gains rates to increase in 2011 you may consider taking the gain in this year in order to save on the potential income tax increase in the rate.
10. Accelerate Your Plans to Marry: If you are considering marriage, consider the tax effects of getting married in December as opposed to January. You are considered married for the entire year even if you get married on December 31. Your new spouse’s income, or lack thereof, should be considered when doing any tax projections because the net effect can be significant. Many of the calculations in any income tax return are driven by the taxpayers’ marital status. Results will vary when considering the effect on the individual or on the couple.
For further tax and personal finance tips, visit the Sound Advice section of the Society’s website at www.nysscpa.org. The New York State Society of CPAs is located at 3 Park Avenue, New York, NY 10016. To learn more about the Society call 800-633-6320.
