What to Do About Year End Tax Planning

It is hard to believe, but in less than two months the year is over. This year, doing year-end tax planning is full of uncertainty, as the tax rules for 2011 are not set. It is not probable that Congress will act in the lame-duck session now that the elections are over. As a result, it is difficult for a person to decide what to do, in order to lower the overall tax bill for 2010 and 2011.

It appears likely that the Bush tax cuts, including the 15% top tax rate on long-term capital gains and corporate dividends, will continue for all filers. If this comes to pass, most people would benefit from accelerating their deductions from 2011 into 2010 and deferring income to 2011. If you expect a higher income in 2011, then do the opposite.

For instance, you can send in your state estimated tax payment in December of 2010, instead of January of next year. If you make your January mortgage payment in December, you may be able to deduct the interest portion in 2010. If you have an elective medical procedure that you need to do and your medical exceeds the 7.5% of adjusted gross income in 2010, you may consider doing the procedure in 2010. If you are going to make charitable contributions in 2011, you can charge them or mail checks in before the end of the year. If you want to donated appreciated stock to a charity that you have owned longer than one year and your would have a gain, you can donate the stock before the end of the year.

If you have capital loss carryforward losses, consider selling stocks in your portfolio which have gains. This will result in no tax on those gains. If you are in the 10% or 15% bracket, dividends and profits on sales of assets owned for more than one year are tax free until the total of those and your other income push you to the 25% bracket at $68,000 of taxable income on joint returns.

If you expect to owe taxes for 2010, consider boosting your withholding so that you will not have an underpayment penalty. You will not have a penalty unless you have not paid in at least 90% of this year’s total tax liability or 100% of 2009 tax liability. If your adjusted gross income is higher, the percent that you need to pay in may be more.

Remember to check with your tax practitioner to consider the alternative minimum tax consequences of your acceleration of deductions and certain other payments.

With respect to making gifts to family members, it is always a good idea to make a gift of up to $13,000 to an individual donee ($26,000, if your spouse joins in the gift). This year it may also be a good idea to make a gift of that amount to grandchildren, as there is no generation skipping taxes owed on that transfer.

If you are in business, there are also some additional considerations. For instance, consider placing new assets in service by December 31. You can expense up to $500,000 of their cost, with certain limitations. In addition you may qualify for bonus depreciation, as well.

There is no certainty in the tax law, which has probably always been the case, although it seems worse this year. Contact your tax professional to see what will work the best for you.