As each year comes to a close, Americans scamper to unearth tax deductions that have escaped their grasp until this point. It is an adage as old as time – or at least since The Revenue Act of 1861 was passed. This year is no different. In fact, due to the uncertain future of our tax laws, 2011 may prove to be one of the most beneficial years to plan accordingly.
Here are some recommendations to maximize tax efficiency in 2011 and beyond:
If possible, and if the circumstances so warrant, defer the debt cancellation until Jan. 1, 2012. Deferral of this event will typically provide increased opportunities to plan for the adverse tax consequences associated with cancellation of debt events.
Qualified Higher Education Expenses
Unless extended by Congress, the up-to-$4,000 deduction for qualified higher education expenses will expire at the end of 2011. As a result, individuals should consider prepaying eligible expenses if doing so will increase the deduction. The deduction is generally allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education.
Traditional IRA Conversion to Roth
If you think that a Roth IRA is better than a traditional IRA, and you plan to remain in the market long-term, consider converting your traditional IRA (depressed valued stocks and mutual funds) into a Roth IRA, if eligible, because it will result in greater taxable income for 2011; however, your assets will increase in value tax-free under the Roth structure. This action is particularly attractive if you believe tax rates will increase in future years.
Realize Losses on Stock
Sell a depressed stock holding and repurchase the same holding 31 days later, which will allow you to take the loss in 2011. The obvious risk is that the stock appreciates during the period (31 days) that you are not an owner. Furthermore, this loss will only be allowed to the extent of your net capital gains plus $3,000. Any disallowed losses will carry forward to future tax years.
Purchase Qualified Small Business Stock (QSBS)
There is no tax on gain from the sale of QSBS if it is purchased before Jan. 1, 2012, and held for more than five years. To qualify for this break, the stock must be issued by a regular 'C' corporation with total gross assets of $50M or less (amongst other requirements).
If You Own Partnership or S-Corporation Interests with Suspended Losses
S-Corporation: Consider making a contribution to the entity to increase basis so the losses can be recognized in 2011. You may also be able to make loans to the entity that will provide you with basis and allow otherwise suspended losses to be recognized in 2011.
Partnership: Consider making a contribution to the entity to increase basis so the losses can be recognized in 2011. Additionally, consider other debt arrangements which will increase basis and free up losses.
Homeowners: Consider making energy saving improvements before Jan. 1, 2012. A tax credit may be available if these improvements are made in 2011.
Annual Gift Exclusion
If you have not done so already, consider making a gift of up to $13,000 per individual donee (spouses can give a combined $26,000 per individual donee). Qualifying gifts will not be subject to gift or estate taxes as they are below the annual gift tax exclusion amount. In order to utilize the 2011 annual gift tax exclusion, the gift must be made in 2011. Taxpayers are not permitted to carry the exclusion forward.
Time Is Expiring
With just weeks remaining in 2011, individuals should be considering these planning opportunities today. Each opportunity is dependent upon the individual's particular situation, so please consult your Katz, Sapper & Miller tax advisor before effectuating any of them.