Time to Make Those Year-End Tax Moves

As the clock winds down on the 2011 tax year, now is the time for physicians to look at their financial situations, consult tax and accounting experts, and determine if there are steps they should take prior to year’s end to better position them for filing income tax returns in 2012.

According to Mark Luscombe, JD, LLM, CPA, and principal federal tax analyst for CCH, a provider of tax and business law information and software solutions, now is the time to incorporate traditional year-end strategies as well as specific ones that address some of this year’s unique situations.

“Some things to take note of include the impact of certain tax benefits scheduled to end with 2011; a look ahead at possible sea-changes in the tax laws starting in 2013; and attention to new opportunities and pitfalls created during the past year through court cases and IRS rulings,” Luscombe says.

Shift income, deductions
If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead, suggests Karla Dennis, a licensed enrolled agent and chief executive officer of Cohesive, a tax consultancy and preparation firm. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value.

“However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity,” Dennis says. “If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available.”

Luscombe echoes those thoughts, and says that the traditional year-end strategy of income shifting applies to 2011. That’s where you attempt to time your income and deductions so that your taxable income is about even for 2011 and 2012, so that your tax bracket does not spike in either of those years.

However, there’s a twist to that rule for 2011 that could impact physicians.

“The twist for year-end 2011 is the uncertain future for tax rates after 2012,” Luscombe says. “Many political observers forecast that higher-income taxpayers will be asked to pay more, either through higher tax rates or more limited deductions. That may suggest a strategy in which income is not deferred but is recognized now at lower tax rates still available in 2011 and 2012.”

Deductions and the AMT
Dennis explains that for 2011, the standard deduction is $11,600 for married taxpayers filing joint returns and $5,800 for single taxpayers. These amounts will likely be about the same for 2012. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next.

For instance, you might consider moving charitable donations you normally would make in early 2012 to the end of 2011,” she explains. “If you’re temporarily short on cash, charge the contribution to a credit card — it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2012.”

But don’t forget the alternative minimum tax (AMT), which Luscombe says can particularly encroach on two-income married couples. He suggests that with most income and deductions for 2011 more predictable as year-end approaches, now is a good time to compute whether you will be subject to the AMT for 2011 or 2012.

“It’s a good idea to consult a tax professional to explore whether certain deductions should be more evenly divided between 2011 and 2012, and which deductions will qualify or will not be as valuable for AMT purposes,” he says.

Gift and estate tax
Luscombe says that the current estate tax through 2012 is set at a maximum 35% rate and a $5 million exemption amount. However, he adds that many experts predict after 2012 that Congress will lower the exclusion to $3.5 million and raise the top rate to 45%.

“In light of this possibility, lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan,” Luscombe says. “The annual gift tax exclusion per donee on which no gift tax is due is $13,000 for 2011, and again for 2012, with $26,000 allowed to each donee by married couples. Making a gift at year-end 2011 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.”

Ed Rabinowitz has recently written
One More Dance, a book about one family's courageous battle against time and glioblastoma brain cancer.