December 2011
'Tis the Season
By Tyler Brooks
Although most gifts arrive beneath the tree in December, you can extend the
season by giving yourself the gift of a lower tax burden on your 2011 return.
Congress has been very active in making multiple legislation changes, many
provisions which will expire at the end of this year. Further, Congress will
have to wrestle with a host of thorny issues in tax years 2012 and beyond.
Therefore, by staying on top of these changes you can do yourself a favor by
saving your hard-earned money. To assist you in this quest, here are some ideas
to implement before the end of this year.
• The 2010 Tax Relief Act extended the homeowners’ energy credit through
2011 for energy efficient improvements to a taxpayer’s principal residence.
Although the credit rate has been lowered to 10% for 2011, it is still available
for energy efficient improvements such as electric heat pumps, central air
conditioners, water heaters, oil furnaces, hot water boilers, and windows and
doors. However, the maximum credit is subject to a $500 lifetime limitation
including amounts claimed in prior years.
• If you are planning to claim a state and local general sales tax deduction
instead of a state and local income tax deduction, accelerate big ticket
purchases into 2011 to assure a deduction of sales taxes. Unless Congress acts,
this election will not be available after 2011.
• If you own appreciated stock that you have held for more than a year and are
planning to make significant charitable contributions, keep your cash and donate
the stock instead. You will be able to deduct the donated stock’s full value as
a charitable deduction as well as avoid paying tax on the appreciation. If the
stock is currently worth less than when you acquired it, however, sell the
stock, take the loss, and donate the cash to charity. If you would give the
stock to charity, your charitable deduction would equal the stock’s depressed
value and you would lose out on recognizing a capital loss.
• If you are an IRA owner or beneficiary who has reached age 70½ and are
contemplating making charitable contributions, you may consider making the
donation directly from your IRA. For 2011, individuals are permitted to make
cash donations totaling up to $100,000 to IRS-approved public charities directly
from their IRAs. These distributions are called Qualified Charitable
Distributions (QCDs), and although they generate no itemized charitable
write-off on Form 1040, they are federal-income-tax-free to you. Therefore, the
tax-free treatment of QCDs equates to an immediate 100% federal income tax
deduction without the restrictions that can delay itemized charitable
deductions. Such contributions must be transferred directly from your IRA to the
charity, and must be made by the end of this year since the provision expires at
the end of the year unless Congress decides to extend it.
• While the unified federal gift and estate tax exemption is a relatively
generous $5 million for 2011 and 2012, it is scheduled to drop back to only $1
million in 2013. Further, the maximum federal estate tax for 2011 and 2012 is
35%, but is scheduled to rise to an agonizing 55% for 2012 and beyond.
Therefore, if it would be a wise idea to reduce your estate, you might consider
making gifts to the next generation. For 2011, you can give $13,000 to each of
an unlimited number of individuals without any negative gift or estate tax
consequences. These transfers may also save family income taxes where
income-earning property is given to family members in lower income tax brackets
who are not subject to the kiddie tax. If your gifts to any recipient in a year
exceed $13,000, you are required to file a gift tax return (Form 709) by the due
date of your 1040 personal tax return, including extensions.
• Unless extended by Congress, the up-to $4,000 above-the-line deduction for
qualified higher education expenses will not be available after 2011. Therefore,
you might consider prepaying eligible expenses if doing so will increase your
deduction for qualifying higher education expenses.
• The reporting requirements for Schedule D, Capital Gains and Losses, have
increased. The IRS is now requiring brokerage firms to separately report:
transactions with basis reported to the IRS; transactions without basis reported
to the IRS; and transactions that do not meet either of the preceding
descriptions. We expect those transactions without basis to receive additional
scrutiny from the IRS; therefore, you may want to work with your broker to
establish basis on your statements. Additionally, brokerage firms will be
required to submit their Forms 1099-B to recipients by February 15, 2012. Be
advised that in order to accurately file your return, you will need to provide
all Forms 1099-B. You may not receive these forms until the end of February.
• The small business health care tax credit is offered for small employers who
pay at least half of the premiums for employee health insurance coverage. Those
qualifying small businesses can claim the credit to potentially cover up to 35%
of the cost of premiums paid for health insurance coverage (25% of premiums paid
by tax-exempt employers).
In order to qualify for the credit, a small employer must: (1) have no more than
25 full-time equivalent (FTE) employees, (2) pay an average wage of less than
$50,000 per FTE, and (3) have a qualifying healthcare arrangement instituted. A
qualifying arrangement is one requiring the employer to (1) pay at least 50% of
the cost of each enrolled employee’s coverage, and (2) pay a uniform percentage
for all employees. The credit is quickly reduced pursuant to a complicated
phase-out rule when an employer has more than 10 FTE employees or pays an
average wage that is greater than $25,000 per FTE.
• If you own your own business and have plans to invest in machinery, equipment
or furniture, or make certain improvements to real property, you might consider
doing so before year-end to take advantage of the increased, but temporary,
Section 179 deduction. For the 2011 tax year, the maximum Section 179 deduction
is increased to $500,000 (dropping back to $125,000 in 2012), as long as the
qualifying property placed in service during the year does not exceed $2
million. Additionally, for 2011, a business can immediately deduct up to
$250,000 of qualified costs for restaurant and building improvements to the
interiors of retail and leased nonresidential buildings.
• In addition to the favorable Section 179 deduction, businesses can also claim
first-year bonus depreciation that is equal to 100% of the cost of most new
equipment and software that is placed in service by December 31, 2011. Bonus
depreciation deductions are allowed to create or increase a business’s Net
Operating Loss (NOL) for the 2011 tax year. The business could then carry back
the NOL to 2009 and 2010 and collect a refund of taxes paid in those years.
Unless Congress extends it, this favorable 100% bonus depreciation break will
expire at year-end.
Although most gifts arrive beneath
the tree in December, you can extend the season by giving yourself the gift of a
lower tax burden on your 2011 return. Congress has been very active in making
multiple legislation changes, many provisions which will expire at the end of
this year. Further, Congress will have to wrestle with a host of thorny issues
in tax years 2012 and beyond. Therefore, by staying on top of these changes you
can do yourself a favor by saving your hard-earned money. To assist you in this
quest, here are some ideas to implement before the end of this year.
Certified Public Accountants
1035 N. Main Street, Findlay, OH
45840 - Phone: 419-422-8111 - Fax: 419-422-5969
2453 West Market Street, Tiffin, OH 44883 - Phone:
419-448-8555 - Fax: 419-448-5885
e-mail: ksc@knuevenschroeder.com