Put time to work for you with a midyear tax review
Summer's here, and December is a long way off — or is it? The bad news is time flies, and year-end will arrive sooner than you think. The good news is you still have time to identify opportunities to minimize your 2011 tax bill and to put plans into action. Here are ideas to consider.
Roths are still tax news
Yes, 2010 was the year of the Roth, and you may have converted your traditional IRA to take advantage of the one-time option to postpone recognizing the income. As you know, half of the related tax bill will be due with your 2011 tax return.
End of story? Not exactly. You can still take advantage of a planning window that may save you money. Under the rules, you have until October 17, 2011, to change your mind about the original conversion, even if you filed your 2010 return before April 18, 2011.
The tax term for the "do-over" election is recharacterization. It works like this: Say the value of the assets you converted to a Roth during 2010 has declined. That means if you had waited until now to convert, you would have ended up paying less tax. Reversing your 2010 decision puts you back in the position you were in before the Roth conversion and wipes out your original tax liability.
Even better, you can still do another traditional-to-Roth IRA conversion after recharacterizing. While the option of splitting the income over future years is no longer available, you can achieve the same effect by reconverting over a multi-year period. Just be aware that time restrictions may apply on this strategy.
Think taxes when paying for higher education
Are you eyeing the start of college in the fall for a first-time student or one who's returning after working during the summer months? Give some thought to the tax effect of paying higher education expenses. The source of the money could make a difference.
For instance, you could draw on 529 plans to cover room and board, while using other funds for tuition and books. Why? Room and board can be taken as a tax-free distribution from your 529 plan, yet may not be a qualified expense for purposes of claiming other education credits or deductions.
Another higher education tax consideration to contemplate: the dependency deduction. No doubt you're aware that you can claim education tax benefits for your dependents. You might also remember that prior to 2010, the exemption you could take for dependents was limited once you reached a certain income level.
That restriction is gone for 2011. Yet because income limits still apply for education tax credits, proactive planning can make a difference in your 2011 tax bill.
As an example, the American Opportunity Credit is reduced when you're married filing jointly and your 2011 adjusted gross income reaches $160,000 ($80,000 for singles and heads of household). Estimating your income now gives you time to craft a family-wide strategy for getting the most benefit from the credit, which can be partially refundable and worth as much as $2,500 per student.
Changes could affect your investment strategy
Got stocks? Then your investment tax planning this summer will incorporate something old and something new.
The old is the favorable long-term capital gain rates for certain investments. With some exceptions, the rates range from zero to 15% depending on your tax bracket, and remain in effect through December 31, 2012.
The new is a requirement that your broker report specific basis information on Form 1099-B, the document you receive at the end of the year with the details on your stock sales. Along with the amount of your sales proceeds, your broker will report what you paid for common stocks that you purchased and sold during 2011.
The change means you'll be asked to decide what shares you're selling. In effect, for shares of stock in the same company purchased at different times, you can choose the shares with the basis that gives you the best tax results. While this option was available in the past, now you'll need to make the decision when you place each sales order instead of waiting until the end of the year.
What if you fail to identify which stocks you're selling before the settlement date of the sale? The default method is first-in, first-out, so you'll use the cost basis of the first shares you purchased — not always the most beneficial outcome for tax purposes.
The clock is ticking on these tax breaks
There are several tax breaks slated to end after this year. As you review your tax situation at midyear, look over the following items to see if you can take advantage of any of them to lower your 2011 tax bill:
- the option for deducting state and local sales taxes in lieu of deducting state and local income taxes.
- the above-the-line deduction of up to $4,000 for higher education expenses.
- the above-the-line deduction of up to $250 for classroom supplies purchased by teachers.
- the option for taxpayers 70½ or older to make tax-free contributions of up to $100,000 from an IRA to charity.
Also, don't forget to check your exposure to the alternative minimum tax (AMT) for 2011. The Tax Relief Act of 2010 increased the AMT exemption amount for 2011 to $48,450 for single taxpayers and to $74,450 for couples. The AMT is a separate tax calculation originally designed to apply only to the wealthy. In recent years, the AMT has begun to hit even middle-income taxpayers.
Finally, call us to schedule a midyear review to discuss the best 2011 tax-saving strategies for your individual situation. We can't slow the speed of time, but we can help you plan to make the most of it.