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Five Year-End Tax Planning Considerations

Legislation passed in December of 2010 extended lower tax rates, deductions, and other expiring provisions for an additional one to two years. As a result, you can consider 2011 year-end tax planning moves with a relative degree of certainty. Here are five things to keep in mind.

1. Tax rates unchanged

The same six federal income tax rates that apply this year will apply next year (these are the same rates that applied in 2010). So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. The rates that apply to long-term capital gains and dividends also remain unchanged; long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% in 2011 and 2012. If you're in the 10% or 15% income tax bracket, a special 0% rate will generally apply.

2. AMT "fix" expires at end of year

While 2010 regular income tax rates as well as the rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest in a long line of alternative minimum tax "fixes" (in the form of increased AMT exemption amounts) is effective only through the end of this year. So, if AMT is a factor in your year-end planning, potential year-end moves are somewhat complicated by the uncertainty of the AMT for 2012. Of course, many expect another AMT "fix" for 2012, but as things stand today, AMT exemption amounts will drop significantly for 2012, increasing the reach and impact of the AMT in 2012.

3. Retirement plan contributions

Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, but qualified Roth distributions are completely free from federal income tax, making these retirement savings vehicles very appealing. For 2011, you can contribute up to $16,500 to a 401(k) plan ($22,000 if you're age 50 or older), and up to $5,000 to a traditional or Roth IRA ($6,000 if you're age 50 or older). The window to make 2011 contributions to an employer plan closes at the end of the year, while you generally have until the due date of your federal income tax return to make 2011 IRA contributions.

4. Retirement plan distributions

Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. Take any distributions by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed.

The year 2011 may be the last opportunity for individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011.

5. Expiring provisions

Barring additional legislation, 2011 will be the last opportunity to take advantage of some expiring provisions:

  • "Bonus" depreciation and IRC Section 179 expensing limits drop significantly in 2012.
  • The increased (100%) exclusion of capital gain from the sale or exchange of qualified small business stock (certain requirements, including a five-year holding period, apply) will not apply to qualified small business stock issued and acquired in 2012.
  • The credit for energy-efficient improvements made to your home expires at the end of 2011. The credit is limited, however, and you may not be able to claim a credit for 2011 if you've claimed it in past years.