Year-End Tax Planning Save by Assessing Your Situation

It’s time to close one tax year and make plans for the next. While this is a busy season for everyone, there is still time to save by assessing your unique situation. So here is your first Christmas gift: nine year-end tax planning tips that can save money and put more presents under the tree.

1. Take Deductions Now

Pay your tax-deductible expenses (real estate taxes, for example) by Dec. 31, and take the deduction this year.

2. Delay Income for Later

If you can convince your employer or client to pay you after Dec. 31, the income is not reportable until 2012. This does not work if you control the income; the IRS will consider you to be in “constructive receipt” of the money.

3. Balance Your Capital Gains and Losses

Review your 2011 stock transactions with your financial advisor. If you recognized gains early in the year, you might take some losses now to offset that income. If you took losses, you might want to sell a winner to absorb them.

4. Adjust Your Withholding

If you expect to owe taxes in April, now is the time to make a final estimated tax payment or to ask your employer to increase your withholding. The latter works better because it helps you avoid underpayment penalties. The IRS treats all withheld tax dollars as if they were paid evenly throughout the year.

5. Use Your Flexible Spending Account

FSAs allow employees to set aside pre-tax dollars to pay for qualified medical and other expenses. You can use pre-tax dollars for expenses that might otherwise not be deductible, such as over-the-counter medications. Now is the time to check the balance in your FSA; if you don’t use it, you lose it.

6. Apply NOLs to Prior-Year Returns

If you or your company made money in recent years but suffered a current loss, you might be able to use that loss to get an immediate refund of taxes paid for prior years. The IRS allows individuals and most businesses to carry back net operating losses (NOLs) for two years.

7. Use the Annual Gift Tax Exclusion

Giving money away is the simplest tool available to reduce your taxable estate. For 2011, the annual gift tax exclusion is $13,000 per recipient. A married couple can give each child or grandchild up to $26,000 without paying gift tax.

8. Supercharge Your Gifts

You can supercharge annual exclusion gifts with a 529 college savings plan, which grows tax-free and can be used for tuition, books, fees, room and board. A donor can immediately sock away five times the annual exclusion amount for a college-bound student without incurring gift tax. Best of all, you can get a state – but not federal – income tax deduction for contributions to the plan.

9. Take Advantage of Congress

Last December, Congress increased the lifetime gift tax exemption (separate from the annual exclusion) to $5 million. This provision expires Dec. 31, 2012, when the lifetime exemption drops to $1 million. If you have a substantial estate you want to transfer tax-free, your window of opportunity is now half closed.

10. Bonus Tip: Get Some Help

Each client’s tax situation is different and deserves individual attention. If you have any questions about these ideas or your personal tax planning, call your tax professional.

By J. Kevin Crain