Tax Tip for December 2011
Year-end tax planning will once again be a
challenge due to a highly uncertain legislative environment. Before
year-end, the Joint Select Committee on Deficit Reduction may issue a
report that could include major tax reform for 2012 and beyond. Even if
there is no major tax legislation by year-end, next year Congress will
have major decisions to make about the post-2012 expiration of the
Bush-era income tax cuts, including the current rate schedules, low tax
rates for long-term capital gains ("LTCG") and qualified dividends, the
expiration of current rules for estate and gift taxation, etc.
That being said, here is a list of actions
that can help you save tax dollars if you act before year-end.
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Code Section 179 depreciation & 100%
bonus first year depreciation. For businesses, 100% bonus first
year depreciation for new machinery, equipment and software is
available through year-end. Starting in 2012, the 100% bonus
depreciation will be reduced to 50%. Additionally, for qualifying
assets bought and placed in service in 2011, Section 179 expensing
of up to $500,000 is available; the maximum expensing amount will
drop to $139,000 for assets placed in service in 2012. |
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Coordinate
your tax planning & financial planning strategies. Strategies
include harvesting capital losses prior to year-end, recognizing
capital gains before year-end to utilize loss carryforwards and to
take advantage of the current low LTCG tax rates, and positioning
your portfolio in anticipation of the new 3.8% Medicare tax on
unearned income (i.e. interest, dividends, nonqualified annuities,
etc) which begins in 2013. Before selling investments you should
consult with your investment advisor. |
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Consider converting all or part of
your traditional IRA into a Roth IRA. Distributions from a Roth
IRA can be tax-free, but the conversion is taxable. With proper
planning you may be able to take advantage of unused lower tax
brackets. |
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Take required minimum distributions
from your IRA (or 401(k), etc.) if you have reached age 70 1/2.
Failure to take a required withdrawal will result in a penalty of
50% of the amount not withdrawn. |
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Make
charitable contributions out of your IRA (if age 70 ½ and older).
Expiring at the end of 2011 is the provision that allows
taxpayers age 70 1/2 or older to make tax-free distributions
directly from IRAs to charitable institutions. This contribution can
be as much as $100,000. The use of this technique enables the
taxpayer to meet their minimum distribution requirements while
simultaneously not increasing adjusted gross income, a key measure
for determining limitations of certain deductions like medical
expenses, investment related expenses and employee business expenses. |
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Make energy
saving improvements to your main home, such as adding extra
insulation, installing energy saving windows, or installing an
energy efficient furnace, and qualify for a 10% tax credit, up to
$500. There is a lifetime credit limit of $500
allowed to the taxpayer for all earlier tax years ending after 2005.
This tax break won't be around after this year. |
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Arizona School Tax Credits.
Qualifying contributions made before December 31, 2011 will generate
a dollar-for-dollar state tax credit as well as a federal itemized
deduction for charitable contributions. Maximum donations to a
qualifying private school are $500 ($1,000 if married filing
jointly ("MFJ")). Maximum donations to a qualifying public school
are $200 ($400 if MFJ). You can take advantage of both of these
school tax credits in the same year. |
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Special Rule
for the Private School Credit: A contribution made by
April 15th may be treated for purposes of this tax credit
as if it was made on December 31st of the prior year.
Thus, a contribution made to a qualifying private school
between January 1, 2012 and April 15, 2012 could be used as a tax
credit on either your 2011 or 2012 Arizona income tax return.
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Arizona Charitable Tax Credit.
Similar to the School Tax Credits, qualifying contributions made
before year-end can generate a state tax credit and a federal
itemized deduction for charitable contributions. The total available
credit is $200 ($400 if MFJ). Contributions made to charities that
assist the Working Poor qualify. A list of these charities appears
on the ADOR website
http://www.azdor.gov
under individuals/tax credits/charitable tax credits. |
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Arizona Tax Credit for Donations to
the Military Family Relief Fund ("MFRF"). Also similar to the
School Tax Credits, qualifying contributions made before year-end
can generate a state tax credit and a federal itemized deduction for
charitable contributions. The total available credit is $200 ($400
if MFJ). To qualify, contributions must be made to the MFRF, and you
must receive a receipt from the AZ Dept of Veteran’s Services (which
administers the MFRF) stating that the donation qualifies for the
credit. Unlike the school & charitable tax credits, unused credits
cannot be carried forward. |
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New Use Tax reporting requirement.
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The Arizona
Department of Revenue ("ADOR") recently enacted new law requiring
individuals to report "Use Tax" on their individual income tax returns.
On November 30th ADOR issued guidance on how the Use Tax will
be calculated and reported.
ADOR advises individual taxpayers that Use
Tax is due when sales tax (either AZ sales tax or another state’s sales
tax) is not paid on purchases made over the Internet, through toll-free
numbers, from mail order catalogs, and from out-of-state locations.
The state Use Tax rate is the same as the
state sales tax rate, currently 6.6% of taxable purchases. There will be
a line on your individual income tax return for reporting your Use Tax
liability.
Generally, the same types of items that are
subject to sales tax are subject to Use Tax. Use Tax does not apply to
items exempt from sales tax, such as prescription medicines, most food
items, casual sales between individuals, and items acquired for resale.
You should retain any documentation that
shows whether sales tax was already paid on items purchased over the
internet, by telephone, through catalogs, or from out-of-state
locations.
Here is a link to the ADOR website that
includes a Use Tax Factsheet and Pub 610, Use Taxes.
http://www.azdor.gov/News/tabid/74/newsid530/350/Use-Tax-for-Individual-Taxpayers/Default.aspx
E mail scams. Please beware that the IRS
does not send unsolicited e-mails to taxpayers about their tax accounts.
Anyone who receives an unsolicited e-mail claiming to come from the IRS
should avoid opening any attachments or clicking on any links. You can
forward suspicious e-mails which claim to come from the IRS to a mailbox
set up for this purpose,
phishing@irs.gov.
The tax planning
strategies mentioned in this letter are general suggestions that may not
apply to
every taxpayer. Please feel free to contact us to discuss your
specific tax situation. By doing year-end tax planning now, we can take
a proactive approach to reducing your taxes, rather than just being
reactive. |
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