Early Tax Planning for 2011


Short-term Tax Planning Strategies that May Help You Save on Your Taxes

No one knows what future tax rates, deductions, and credits will be, so how can we help you develop a plan to minimize your federal income taxes when there are so many uncertainties? Last December Congress approved several short-term tax breaks. Contryman professionals can help you with planning strategies that may help you save on your taxes now, but you should meet with us as soon as possible so there is time to implement. We even have some strategies that will help you hedge against uncertainty.

 

Take Advantage of Expiring Tax Cuts

There are two types of tax breaks that may expire in the next year or two. There are tax breaks which have been extended in the past, but which may not be renewed given the current deficit. There were also “giveaways” in recent tax law that were designed to help the struggling economy recover. These, too, are unlikely to be renewed.

 

100% Write-Off for New Equipment

Business owners have a deduction that is available only through the end of 2011. They are allowed a 100% write-off for new equipment put into service by December 31. Unlike Section 179 write-offs, as a business owner, you can not only claim losses generated by the 100% bonus depreciation against other income, you can carry the losses back three years even if they generate a tax refund.

Section 179 depreciation can only be used to write off a vehicle costing less than $25,000 that is purchased for business purposes. Bonus depreciation can be used for new vehicles weighing more than 6,000 pounds, regardless of the price. Talk to your Contryman professional about which vehicles qualify and how this may help you, but remember this write-off expires at the end of this year.

Conservation Easements

Land owners may consider granting a conservation easement. With these easements, you agree not to develop the land and you get a deduction for lost value. In 2011 you can deduct up to 50% of your adjusted gross income instead of the usual 30%. Farmers and ranchers who get more than 50% of their gross income from farming can offset up to 100% of their income if they act this year. Deductions for 2011 can be used over 16 years until used up instead of the normal six-year carry forward. Click on this link Conservation Easement Power Point to view a Power Point presentation made by Contryman President Jeff Anderson to the Rainwater Basin Joint Venture on the Financial and Tax Implications of Land Exchanges and Conservation Easements.

 

Charitable Contributions from Your IRA

Taxpayers age 70½ or older can transfer up to $100,000 directly from their traditional pre-tax Individual Retirement Account (IRA) to a charity without counting the transfer in their income. Although you won’t get a charitable deduction for the dollars transferred, the direct transfer may result in a lower tax bill. The transferred amount can be counted against your annual minimum distribution required of people 70½ and older. This may result in sparing a senior from extra Medicare premiums charged to higher income taxpayers.

Take Advantage of Low Capital Gains Rates

If Congress takes no action, the top federal tax rate on ordinary income will go from 35% to 39.6% in 2013. Long-term capital gains rates will go from 15% to 20%. If your regular tax rate is 15%, your capital gains rate is currently 0%. In 2011, the 0% bracket applies to people who claim the standard deduction with gross income up to $44,000 for a single and $90,300 for a couple. This may provide an opportunity for retired taxpayers to recognize some tax-free gains or for parents to give appreciated stock to younger adult children who can sell it and pay no gains tax. Note: The “kiddie tax” still applies to full-time students up to age 24. Any investment income they have over $1,900 is taxed at the parents’ higher rate.

Social Security Tax Reduction for 2011 Only

Employees will pay only 4.2% (instead of the usual 6.2%) Social Security tax on compensation received during 2011 up to the Social Security tax ceiling of $106,800. Similarly, for tax years beginning in 2011, self-employed persons will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. We have recommended that taxpayers consider investing the additional amount they receive in their paychecks this year in their 401(k) or other retirement account.

American Opportunity Education Tax Credit

The American Opportunity Education Tax Credit can be worth as much as $2,500 and is 40% refundable. The credit can be claimed for up to four years of undergraduate education. It was scheduled to expire at the end of 2010 and be replaced by the Hope Scholarship credit which is smaller and can only be claimed for the first two years of college. The Hope credit is also subject to phase-out at lower income levels and is non-refundable. The more generous American Opportunity credit has been extended through 2012. If you have a college student in your family or if you are in school, let us know so we can explain the specifics of this credit.