Added by Erik West on December 16, 2011
Time is running out on 2011. But you can still control several year-end steps that could boost your tax deductions and trim your taxable income.
Here are some moves you can make, even in the dwindling days of this year.
Defer income to 2012. To the extent you have discretion, delay billings, bonuses, and similar income to next year.
“This is one of the easiest tactics for entrepreneurs to use ,” said Clay Stevens, director of strategic planning for Aspiriant, a Los Angeles wealth management firm.
Mutual fund distributions. Many mutual funds pay taxable capital gains and dividends at year-end. If that’s a concern for you with a fund in a taxable account, check the fund’s website.
Does the fund have a history of hefty payouts? Is the fund family forecasting one this year? You can sell a fund to avoid a distribution. You can also put off starting or expanding a stake in that fund.
Bear in mind that if you take that step, you risk missing any sudden gains the fund makes, which may be far bigger than any taxes you dodge. If you do sell shares, beware of the wash rule.
If you buy back the same shares within 30 days, any loss you took on the sale would be disallowed as a write-off.
IRA distribution to charity. If you are over 70 1/2 you can make charitable gifts up to $100,000 directly to a public charity (but not a donor-based fund or private foundation) from your traditional IRA. The IRS treats the donation as part of your annual required minimum distribution. That means you don’t report the distribution as income. But the IRS’ largesse is limited. You can’t deduct the charitable gift on your individual tax return.
Other charitable deductions. At any age, you can make regular contributions via your checkbook instead of your IRA. Do so before Dec. 31. You can typically deduct cash gifts of up to 50% of your adjusted gross income (AGI).
If you want to set up a donor-advised fund, ask your mutual fund family if you can meet the Dec. 31 deadline. You may need only a few days to do paperwork and deposit funds.
If you have a private foundation, you can involve family members in charitable goals. Annual legal, accounting and other administrative costs can hit $10,000 and up. At that level of expense, starting a foundation is practical only if you can afford charitable donations of at least $1 million, says Jim Duggan of the Chicago law firm Duggan Bertsch.
Your contribution must be in the foundation’s account by Dec. 31.
The charitable deduction is capped at 30% of AGI. But the foundation does not have to give all of that away for you to get the deduction. Basically, you get the full deduction so long as the foundation gives away at least 5% of its investable assets annually.
Residential energy credit. The credit is equal to 10% of the cost of qualified energy efficiency improvements, up to $500. It applies to improvements installed in your principal residence and placed in service before Jan. 1, 2012.
Windows, doors, insulation, roofing, HVAC and nonsolar water heaters meeting certain energy guidelines are eligible.
Casualty claims. Claim any losses you suffered in any of this year’s many natural disasters. The president declared 98 federal disasters in 2011, a record, says tax prep service H&R Block. The culprits included Hurricane Irene, Midwest tornadoes and wildfires in Texas.
IRA contributions. If you are eligible, you can put a maximum of $5,000 into IRAs this year. You can also kick in up to $1,000 in catch-up contributions if you are age 50 or older.