BLOG Detail

Year End Tax Tips
Friday, December 23, 2011

1. Offsetting capital gains
 
Tax-loss harvesting is the process of selling investments that have lost value in order to offset any capital gains you realized during the year.  If you end up with more losses than gains, you can use the remaining losses to offset ordinary income up to $3,000. If you still have excess
losses, you can carry them over to offset capital gains and ordinary income in future years.
 
You should be careful to make sure that you do not repurchase the stock you sold within 30 days before or after the sale - this will negate the sale for tax purposes under "wash sale" rules.  Should this occur, you will not be
able to use the losses from the sale to offset any capital gains.
 
2. Contribute to your tax-advantaged retirement accounts
 
There are many different retirement accounts which are available to help lower your taxable income, such as a 401(k) plan, 403(b) plan, or IRA.  Contributions to your retirement account are generally not included in
your taxable income for the year.
 
The 401(k) plan contribution limit for 2011 is $16,500, and if you reach age 50 before the end of the year, you can kick in another $5,500 as a "catch-up" contribution. The ability to contribute at this level depends on your income and plan contribution rules.  You have to contribute to these
plans by the end of 2011 in order to qualify for this tax deduction.
 
For IRAs, the contribution limit for the year is $5,000, or $6,000 if you're 50 or older in 2011. Although the contribution limit is lower than for 401(k)'s, you don't have to make a contribution before the end of the calendar year.  One can contribute to an IRA for 2011 right up until the
tax-filing deadline of Tuesday, April 17, 2012.  However, there are income restrictions for deductible contributions
into an IRA. The deduction phaseout starts at $90,000 of modified adjusted gross income (MAGI) for couples filing jointly and $56,000 for single filers.
 
3. "Bunch" itemized deductions
 
By bunching deductions in the current year, you may be able to lower your 2011 tax bill.  Paying real estate taxes early or making estimated state income tax payments before year end can provide additional itemized deductions besides the ones you would normally take.  Additionally, making
charitable contributions and prepaying medical expenses (both respectively discussed in points 4 and 5 below) are other itemized deductions which can fall into this strategy.
 
To make this work, you will need to itemize your deductions when filing taxes rather than take the standard deduction ($11,600 for joint filers and $5,800 for single filers), so if you do not have itemized deductions higher than the standard deduction this will not work. Also, this
strategy may not be effective if you're subject to the alternative minimum tax (AMT) as the AMT phases out certain itemized deductions.
 
4. Charitable contributions
 
An additional itemized deduction available to all is charitable contributions.  The amount of your deduction for charitable contributions is generally limited to 50% of your AGI.  In particular, one should consider donating appreciated
stock held longer than one year as these securities would provide a tax deduction of their current fair market value and one could avoid paying capital gains tax on the gain.
 
5. Prepay medical expenses
 
If there are medical expenses such as elective surgery, dental work, or other medical expenses that you can prepay this year in order to exceed the threshold of 7.5% of AGI and you itemize deductions, you should do so as every
dollar above this threshold will reduce your taxable income.  For example, if you had $100,000 of AGI, the threshold would be $7,500.  Every dollar above $7,500 would reduce your taxable income by $1 as long as you were not subject to AMT.
© 2012 Green Oak Financial Services | 617.615.6486 | info@greenoakfinancial.com