New tax law brings 2011 planning opportunities

If you think you can relax now that the Bush-era tax cuts have been extended, think again. There are still plenty of changes and challenges ahead to make tax planning in 2011 as important as ever.

Seize the moment

December’s tax legislation rescued many of the tax breaks we have become accustomed to. But have you taken full advantage of those perks? For example, higher earning taxpayers will again be spared limitations to their itemized deductions, so 2011 might be a year to maximize your charitable, home interest, and property tax deductions.

Have you invested in green technology for your home or business yet? Modified energy tax credits are still available for qualified energy-saving purchases in 2011. The enhanced college education expense credit was also preserved, averting a return to the old Hope credit rules. This means families will continue to qualify for education credits and deductions, subject to income limits.

Maximize your nest egg

Investors should note that the historically low capital gains tax rates have been extended through 2012. With that in mind, it might be time to “harvest” some of those unrealized gains in case tax rates rise again in the future. Also a tax-savvy way to completely eliminate your capital gains tax might be to donate appreciated stock to charity and receive a deduction equal to the security’s current market value. Special rules apply to noncash donations, so check with us before you move forward on this strategy.

Know your IRA options

Thanks to the extension of the “charitable IRA rollover” rule, taxpayers age 70½ and older can again use their IRA to make a donation to their favorite charity. The distribution can be used to offset some or all of your required minimum distribution.

Another exciting option is a Roth IRA conversion. If you procrastinated on converting your regular IRA to a Roth last year, you can still do so in 2011. Although converting your IRA generates taxable income in the year of the transfer, later withdrawals of contributions and income from the Roth are tax-free. Making this transfer while income tax rates remain low could pay off big time. And your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.

Cash in on the new business rules

Get an early start to maximize the new tax breaks for your business. The 50% bonus depreciation was increased to 100% – but only for assets purchased from September 9, 2010, through December 31, 2011. While this increase makes it seem there’s little difference between bonus depreciation and Section 179 expensing, each election has distinct rules that can impact decision making. One example: Bonus depreciation is available only for new assets; expensing applies to both new and used assets. Another depreciation break is the reinstatement of the 15-year expensing period for qualified leasehold improvements, restaurant property, and retail improvement property.

Qualified businesses with less than 25 full-time employees can receive a tax credit of up to 35% of employer-paid health care costs. Another fringe benefit to consider is the tax-free reimbursement of employees’ mass-transit commuting expenses. Workers can be reimbursed up to $230 per month for qualified highway vehicle transportation and transit pass expenses, and up to $20 per month for bicycle commuting costs.

While it doesn’t reduce your tax bill, you might raise your workers’ morale by informing them that they no longer have to account for the personal use of their company-provided mobile phone. Such recordkeeping requirements were eliminated last year.

Consider a few proven strategies

From year to year, some old-time tax strategies consistently pay off. For example, maximizing your annual retirement plan contribution usually makes sense. Even though contribution limits remain the same in 2011, you might stretch your retirement planning dollars even more by making payments earlier in the year rather than just at the end. Contributing earlier could possibly result in some stock market appreciation throughout the course of the year.

Another tip: Get an early handle on your tax withholdings and estimated tax payments. Changes in your family or work situation – as well as the new social security tax cut – might result in a lower tax bill in 2011 and a decrease in required tax payments. And if you anticipate moving or changing jobs this year, remember that out-of-pocket expenses incurred while searching for a new job or moving to a new city can score you a possible deduction.

This might also be a good year to tighten up your bookkeeping methods. IRS audits are on the rise, and you will want the peace of mind that comes with a rock-solid recordkeeping system. Businesses have another reason to keep good records: the new Form 1099 reporting rules. Unless Congress changes a 2010 law, beginning in 2012, businesses will have to file Form 1099s reporting all payments made to vendors for goods or services totaling $600 or more per year – including payments to corporations. To avoid last minute headaches, begin collecting vendor tax identification numbers now and make sure your accounting system can handle the new requirement.

Maintain your edge

Even with the extension of many old rules, tax planning this year will be a brand new challenge. Don’t let your guard down.

First published in The SBSB Bulletin, January 2011