Most people are pretty busy with the holidays at this time of year. But now is an ideal time to make some financial decisions and take advantage of some planning opportunities – some of which will turn into a pumpkin at midnight on December 31st!
Because almost all individual taxpayers and the vast majority of small businesses run on January-to-December fiscal year, November and December are key months for planning everything from taxes to investments to small business inventory and expansion decisions. Every case is different, but here are just a few of the routine things we look at when we conduct year-end consultations with our clients.
Tax loss harvesting opportunities
If you have sold property this year at a profit, chances are very good you will have a capital gains tax liability for the year. However, tax rules allow you to subtract any capital losses you realized for the year against your gains. This means you have until the end of the year to find something to sell at a loss, in order to cancel out gains for the year.
At Vaerdi, we routinely go over each of our clients’ assets, helping our clients determine their cost basis in their investments, and work out a tax loss harvesting plan. We also help them plan for the opportunity to use excess losses over and above this years’ gains to offset taxes on up to $3,000 per year in income in future years – and help them navigate the so-called “wash sale” rules.
Alternative Minimum Tax assessment
The alternative minimum tax, or AMT, is actually a separate set of tax rules designed to ensure that high-income families and individuals cannot manipulate the system of available tax deductions to avoid paying significant income taxes altogether. If you have a solid upper middle class income, have a large home mortgage interest deduction, several children, and you take a variety of miscellaneous itemized deductions, now’s the time to make an AMT risk assessment. If you are subject to the AMT, some deductions may be disallowed. There are some things we can do to help you maximize your available deductions, or minimize your exposure to the AMT – but we have to do that planning by the end of the calendar year or many of those opportunities will vanish.
Fund Retirement Accounts
Sure, most of you will want to fund any IRAs you are eligible for by April 15th. But some of you may have other options as well. For example, if you have your own business, you may be able to fund a SEP-IRA with up to $49,000 for the year – and $49,000 for the next year, or up to 25 percent of your income for the year – whichever is less. Special rules apply to account for those who are self-employed and have self-employment tax liabilities, but the opportunities are substantial – particularly if you can set the plan up by the end of the year. The IRS also gives businesses a tax credit to start up new small business retirement plans, such as solo 401(k)s and SEP IRAs, though it’s too late to claim the credit for a new SIMPLE plan this year.
Accelerate Deductible Expenses
If you were planning on making any deductible purchases, such as inventory or equipment for a business in 2012, you can use a credit card to accelerate those deductible expenses to the current year. That way, you’re using the bank’s money to get an immediate tax benefit. However, not all business expenses are fully deductible in the current year. Some expenses have to be amortized over the useful life of the investment. Special rules may apply for startup expenses and so-called “Section 179” small business expenses, which may allow you to accelerate the deductions on these expenses as well.
Tip: If this year is an AMT year, but next year will probably not be an AMT year, it may not make sense to accelerate deductions. You may be better off taking them next year.
Pay Your Advisor Early.
That’s me, I hope! Most investment advisory fees and tax preparation fees are tax deductible in the current year. By pre-paying your January commissions and fees for advice, you can move the deductions into the current year.
Use Flexible Spending Accounts
Some employee benefits, such as health care flexible spending accounts, operate on a ‘use-it-or-lose-it basis. Be sure to commit any flexible spending account money by the end of the year, or it could revert back to your employer! Now’s a great time to use that money to get new glasses, braces, Lasik procedures, buy needed medical equipment, or get prescriptions filled.
Try to prepay education expenses for the first semester of 2012 before the end of the year. This is because under IRC 122, higher education expenses are an “above the line” adjustment to income. You don’t even have to itemize to claim the benefit of the college tuition tax credit, which could be worth up to $4,000. But that provision is set to go away in 2012, so you need to commit those funds before the end of the year.
These are just a few of the common year-end planning measures to consider. If you own a business, you may have other opportunities to save on taxes as well. Now’s the time to schedule these appointments, though, because once the new year rolls around, you’ve lost your window of opportunity.