Year End Tax Planning Tips

While there's not a lot of time left before the end of the year, there are things you can still do to reduce your tax liability.  A number of tax provisions end on December 31st of this year, so this will be your last chance to take advantage of them.

Tax Planning For Individuals The election to deduct either state and local income or sales taxes as itemized deductions expires this year. If you are contemplating buying a large item, such as a car, you may benefit by making the purchase in 2011. You can convert a traditional IRA to a Roth; this may make sense if you expect your 2011 income to be lower than in the future.   If you reached age 70 1/2 during 2011 you must begin taking a distribution from your traditional IRA by April 1, 2012.  If you wait until 2012 to withdraw it, you will need to take a second distribution during 2012.  It may be better for you to take that first distribution in 2011 and avoid doubling up in 2012. If you have a health savings account (HSA) you should consider making the maximum contribution you can, even if you need to withdraw it right away to pay for qualified medical expenses.  Since this is an "above the line" deduction, it has the added benefit of reducing your AGI, which could make you eligible for other tax benefits. Making charitable contributions not only helps others, but can save you taxes. The "American Opportunity Education Tax Credit" runs through 2012. To get the full $2,500 credit in 2011, you must pay at least $4,000 for qualifying expenses by December 31st.  If you have already paid this much, you may want to wait until 2012 to pay for the spring semester to be sure you are eligible for the credit next year.  This credit does have an income phase-out, so not everyone will qualify. If you need cash to pay for qualified education expenses, you should consider withdrawing the funds from your IRA.  While the amount will be subject to income taxes, you will avoid the 10% early distribution penalty.  Just be sure to pay the expenses in the same year that you take the distribution, otherwise the penalty will apply. The alternative minimum tax "patch" is scheduled to expire this year.  Those taxpayers who will be subject to the AMT in the future may find it advantageous to pay property and state income taxes in 2011 rather than waiting until 2012 when the taxes are due. The adoption credit was increased to $13,360 for 2011 and made refundable, meaning that you will benefit even if your federal income tax is not high enough to absorb the entire credit. However, you must finalize the adoption by December 31, 2011 to be eligible for the credit in 2011.  The credit will be reduced and no longer be refundable after this year.