As the year draws to a close, it’s time to squeeze in some tax deductions and take actions that might save you money come April 15th. If you are looking to reduce your tax liability, here are a few yearend tax planning tips:
Consider Roth conversion: If you have a traditional IRAs, consider a Roth conversion. Remember, Roth conversions result in taxable income, so there are many things to consider in determining whether a Roth conversion makes sense for you, such as what tax bracket you’re in now vs. retirement, ability to pay the additional tax on conversion, years until you retire, etc. But if during this difficult economy, your 2011 income has decreased more than usual, it might make sense for you to convert. Roth conversions MUST be done by 12/31/11.
Maximize your 401(k) contributions: By maximizing this retirement contribution you reduce your taxes, as well as reducing AGI which may qualify for more deductions and credits that are subject to AGI phase-out. The maximum contribution for 2011 is $16,500 plus an additional $5,500 if you are 50 or better. The only time you can contribute to your 2011 401(k) is in 2011!
Make charitable contributions: Support causes that you believe in. Clean out your closet and donate to charity. Make sure you have the documentation, such as a receipt from the charity to support all contributions, even those under $250.
Estimate taxes due for 2011: If you think you will owe, adjust withholding accordingly, in order to avoid underpayment penalties. Also, if you pay any state taxes due you may get a Federal deduction. Also consider prepaying your April property tax installment. But beware that you are not subject to Alternative Minimum Tax (AMT).
Prepay college tuition: Think about prepaying college tuition for first term of 2012 in order to qualify for the full $4,000 subject to the American Opportunity Credit. If your AGI is under $180,000 ($90,000 if single), you may qualify for the credit of up to $2,500. If you don’t qualify for the credit you may be eligible for the tuition deduction which is scheduled to expire after 2011.
Spend your FSA: If you still expect to have funds in your Flexible Spending Account (FSA), make arrangements to have doctor checkups, elective procedures, etc. by December 31, so that you can use your FSA funds. FSA funds for each year are “use it or lose it!”
Install energy-efficient insulation, doors, and/or windows: If these meet certain energy-efficient qualifications you may be able to claim the nonbusiness energy property credit of up to $500. This credit is currently scheduled to expire after 2011.
If you want to know how the above suggestions might affect you, please contact us.