Year-end tax planning is especially difficult this year due to uncertainty over whether Congress will act on sweeping tax reform, extend only pieces of legislation, or do nothing and let Bush-era tax provisions expire at the end of 2012. Regardless of what Congress does or doesn't do, there are still tax breaks available for 2011 that may help lower your tax bill. In addition to tax breaks, some actions focus on the time-tested philosophy of deferring income and accelerating deductions with the overall goal of reducing taxes. Not all the actions mentioned in this article will help everyone; however, we are confident that many of the actions listed below will help you come tax time.

We hope you enjoy this issue. All year long, we work to bring you related news and analysis through our alerts, newsletters, and webinars. Please visit our website often for more tax-related information, including recent webinars on year-end tax planning for businesses and for individuals, recent tax alerts, our year-end tax planning guide, and information on our tax webinar series.

As always, if you have comments, questions, or concerns about accounting matters, or any Baker Tilly communications you receive or would like to receive, we’d like to hear from you. Please feel free to e-mail us at cpa@bakertilly.com.

We look forward to sharing more information with you in 2012. From all of us at Baker Tilly, have a great holiday season.

Tax planning considerations

• Prepay business expenses before December 31 to accelerate deduction to 2011 (for cash-basis taxpayers) if you expect your tax rates to stay the same or decrease in future years.
• Use credit cards to accumulate points and accelerate the deduction into 2011, charges do not need to be paid before year end to take the tax deduction.
• Defer recognition of income by waiting until 2012 to invoice patients who received services in late 2011 if on the cash basis of accounting.
• Make additional catch-up contributions for those over age 50 to retirement savings plans. For a 401(k) plan the catch-up contribution amount is $5,500 and for a SIMPLE plan it is $2,500 for 2011.
• Consider converting 401K or an IRA to a Roth 401K or Roth IRA.
• If a Roth conversion was done earlier in the year, and the account value has since declined, consider recharacterizing the rollover or conversion back to a traditional IRA and later reconvert it to a Roth IRA to reduce the taxes paid on the original conversion (note that you must wait 30 days from the date of conversion to recharacterize the conversion).
• Consider a cash balance retirement plan add-on to the company 401(k) if your employee census is favorable.
• Offset capital gains with capital losses—dump some losing stocks if you will have a capital gain to offset it with this year assuming you don’t have capital loss carryovers. Consider replacing some losing investments with comparable investments to create capital loss carryovers that could be used to offset future capital gains at potential higher rates assuming the preferable capital gains rates expire.
• Donations: you get the largest tax deduction if your donation also comes with some advertising—then pay it by December 31 with business dollars
• Consider selling a car or boat before gifting it to charity; gift appreciated stock or cash first.
• Consider homeowner’s energy savings purchases for credit up to $500. Talk to the vendors for qualifying items such as windows, doors, insulation, heating, and cooling. Note that the qualifying item must be installed in your home before 2012 to qualify.
• Consider making expenditures (i.e. new equipment) that qualify for 100% bonus first year depreciation if bought and placed in service this year. Businesses also should consider making expenditures that qualify for the up to $500,000 business property expensing option for assets bought and placed in service this year. Assuming congress doesn't act, the bonus first year depreciation will drop to 50% and the automatic expensing will drop to $139,000 beginning in 2012.
• Put children on the payroll with business role and reasonableness of compensation documented - take pictures of them in practice.
• If using a medical reimbursement plan, reimburse yourself by December 31. Don't forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.
• Medical bills: close to exceeding the 7.5% of your income? Go ahead and pay for some elective procedures before December 31.
• Consider applying a bunching strategy to miscellaneous itemized deductions, medical expenses, and other itemized deductions to help you exceed the AGI thresholds and benefit from the expenditures.
• Consider small business tax credit for health insurance premiums paid.
• Consider home office reimbursement for S corps.
• If you are in the process of hiring new workers, consider taking advantage of a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions.
• Consider payment of bonuses before year end.
• Talk to your tax advisor about tax basis in your S corporation or partnership and the ability to currently deduct losses.
• Consider an S corporation conversion if your practice is operating as a regular C corporation.
• Reimburse employees and owners for business mileage used on personal vehicles before 12/31/2011.
• Remember required minimum distributions from your retirement plan for 2011 if over age 70 1/2.
• Consider 529 college savings plan contributions for self, children, and grandchildren. Up to $3,000 per individual is deductible for Wisconsin.
• Talk to your tax advisor about maximizing education credits and claiming or not claiming children as dependents.
• Consider changes in estate tax laws for planning in 2011 and 2012.
• Make gifts before year end. You and your spouse are each able to gift $13,000 tax free to each individual for a total of $26,000 per individual.
• Remember home mortgage indebtedness is limited to $1 million and $100,000 of home equity used to improve home. IRS is scanning returns for interest in excess of $60,000.
• Make cell phones business assets, if not already. IRS has changed the rules to specifically allow this.
• If you are self-employed and haven't done so yet, consider setting up a self-employed retirement plan.

Annual non-tax related suggestions

• Consider mortgage refinance—rates are around 4%.
• Review your business insurance—do you need to increase the value of the policy to cover new equipment or furniture?
• Examine your liability insurance if you have an employee driving to do office tasks—are you covered if he or she gets in an accident?
• Check your bank accounts and retirement plan—are you within the FDIC maximum deposit insurance of $250,000 per owner/co-owner?

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