12/20/2011 3:30 PM ET|
Last-minute moves to cut your taxes
The holidays are approaching fast. And my gift to readers is a gentle reminder to make those last-minute tax moves.
I say this every year: Your tax planning for your 2011 return should have started last December. It's more complicated this year because tax laws have changed again. They always do.
Still, there are moves you can and should make before Dec. 31 to trim your 2011 tax bill.
Let's start with the simple things.
The easy stuff
Charitable donations. If you contribute to your church, your college, the local dog pound, the United Way, organizations that help with disaster relief or whatever, make these donations before Dec. 31.
And make sure, before you file your tax return, that you have a receipt from the organizations that benefited from your generosity.
If you don't have the cash, find out whether the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it's valid as a 2011 deduction, even if you don't pay the bill until next year.
Separately, any contributions of clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, an appraisal is required. The Internal Revenue Service can deny a deduction for items of minimal value.
Complicating any deductions are the requirements on record keeping. This is important.
To deduct a cash donation, regardless of the amount, you must have a bank record or a written communication from a charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records include canceled checks or bank or credit union statements containing the name of the charity and the date and amount of the contribution.
Your flexible spending account, or FSA. This isn't exactly a tax savings, but if you don't use the dollars you contribute to a flex plan, you lose them.
The IRS allows purchases made up through March 15, 2012, to count. Your employer can give you a debit card for your FSA spending. That eliminates a whole lot of paperwork. In the past, you could even pay for nonprescription drugs through an FSA. But Congress changed the rules again, and 2010 was the last year nonprescription drugs qualified. Now, only prescription drugs and insulin can be paid tax-free out of your FSA.
Be careful, though. Unless your employer's plan also is amended to allow the March 15 extension, you won't qualify.
Mortgage interest. Make your Jan. 1, 2012, mortgage payment by Dec. 31, 2011. Remember to add the extra interest paid to what your bank reports on its Form 1098 -- it'll get your payment in 2012 and won't report it for 2011. But you paid it in 2011, so it adds to your deduction this year. (The downside is that you won't be able to deduct the payment from your 2012 return. But offset that with a payment of your January 2013 mortgage in December 2012.)
Real-estate taxes. If you pay your own real-estate taxes, make any payments due in the beginning of 2012 by Dec. 31, 2011. My fourth-quarter real-estate tax is due Feb. 1, 2012. By paying before the end of 2011, I can get the deduction a year earlier. (Again, you can't deduct payments made in 2011 from your 2012 return.)
One note: Taxes aren't allowed as a deduction under the alternative-minimum-tax computation. If you think you will be hit by the AMT, don't prepay.
Homebuyer credits. If you didn't own a principal residence during the past three years prior to buying a home, you qualify as a first-time homebuyer. You must have had a binding contract by April 30, 2010, and closed by September 30, 2010, to qualify. If you meet those criteria, you get a refundable credit of 10% of the purchase price, up to $8,000.
You may also qualify if you've owned a principal residence for at least five years and bought a new one within the time limits above. The house doesn't have to be new. But it has to be a new principal residence. If the house cost more than $800,000, or if you weren't yet age 18, you don't qualify. This credit is limited to $6,500.
The homebuyer credits phase out for single taxpayers with modified adjusted gross incomes of $125,000 to $145,000 and for joint filers with incomes of $225,000 to $245,000.
If you failed to claim this credit last year, you can still get it by filing an amended return, Form 1040X. Keep in mind that in the tax world, terms such as "first-time homebuyer" don't necessarily mean "first-time homebuyer."
Medical and miscellaneous deductions. Medical expenses and miscellaneous itemized deductions have "floors." For medical expenses, only those in excess of 7.5% of your adjusted gross income count toward tax deductions. Miscellaneous itemized expenses have to exceed 2% of your AGI to qualify.
An important point: Your health insurance premiums count so long as you're not paying them out of a flexible spending account. Premium payments for long-term care also count. But they may be limited depending on your age.
If you're going to exceed the floor, accelerate your expenses. Prepay your orthodontist or your tax preparer. Mail your checks on or before Dec. 31, 2011. Alternatively, if you're not going to exceed your floors, defer the deductions to 2012. You may exceed your floors then.
Pension or IRA contributions. These are especially important if you are self-employed. Unless you expect tax rates to shoot up, you want to pay your tax tomorrow rather than today.
Capital gains and losses. 2011 has been another wacky, volatile ride for investors, but the market is likely to show gains for this year. If you have capital gains, remember that any net capital losses over the $3,000 allowed on your 2010 tax return should be carried forward to offset those 2011 gains. If you still have net losses, up to $3,000 may be used to offset ordinary income for 2011.
All net long-term gains are subject to a maximum 15% rate. If you're in the 15% or lower tax bracket, your tax hit falls to zero.
If you're single with taxable income of $34,500 or less, you get the 0% rate. With a standard deduction of $5,800 and a $3,700 personal exemption, you can have as much as $44,000 in gross income and still qualify.
If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income. If you have shares of stock pregnant with gains and you don't expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case: Pay the maximum 15% tax. You can't go broke taking profits.
AMT: A headache you may face
I fully expect another year of last-minute relief on the alternative minimum tax. And if we don't get it, I encourage you to yell loudly at your representative and senators for not getting the job done.
More and more middle-income taxpayers are being hit with the AMT each year, which is basically a parallel tax system designed to ensure that everyone pays some tax. But it's forcing too many people to pay more tax than they should.
Each year, Congress has extended the AMT exemption. For 2010, it increased the exemption to $72,450 in taxable income for married couples filing jointly and $47,450 for single taxpayers. For 2011, these numbers were increased to $74,450 for joint returns and $48,450 for singles.
Last year you could make energy-efficient improvements to your home and qualify for a credit of 30% of the cost with a maximum of $1,500. Insulation, energy-efficient windows, and heating and air-conditioning systems all qualified. For 2011, the credit was cut to 10%, up to only $500 (reduced by any credit claimed since 2006), with a cap of $50 to $300 on fans, furnaces, water heaters, heat pumps and central air conditioning, and a $200 cap on windows.
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 30th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles.
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