Tax Deductions and Year-End Planning Tips

The end of the year is a busy time with planning for the Holidays and visiting with friends and family.  It is also an important time to consider the tax implications of decisions you have made this past year or are contemplating for the new year.  By taking the time now to review recent tax law changes you can ensure that you don't miss out on any tax deductions that you are entitled to.

Year End Tax Planning

  1. File a New w-4 – Life changes such as a new baby, marriage, divorce, or a new mortgage will change your tax liability for the year.  By adjusting your withholding now, you can receive the savings in your paycheck throughout the year.
  2. Estimated Taxes – If you have a shortfall in your estimated tax payments, you have until January 18th of the following year to file estimated tax payments.  If you had income from freelancing, investment income, or unemployment income, there was probably no tax withheld so you will owe the IRS taxes.
  3. Flexible Spending Account – Any funds left in your FSA after year-end are forfeited.  Check with your plan administrator to find out if medical services received and paid for through March 31  For 2012 their is no cap on contributions however FSA contributions will be capped at $2500 for 2013 with yearly increases for inflation.
  4. W-2s and 1099s – Be sure to notify your current employer(s), clients and investment accounts of your current mailing address.  You should receive a 1099-Misc for earnings in excess of $600.  If you do not receive a 1099-Misc, contact your employer and respectfully request a copy via mail, fax or email.  If you have clients, they will be sending you a Form-W-9 to fill out.  You are required to provide the information requested and if you do not you can receive a $50 penalty and 28% back-up withholding on all future payments from that business.
  5. Income Deferral – Ask employer to pay bonuses next year.  Wait until next year to sell investments with taxable gains or take distributions from an IRA or other retirement account.
  6. Income Acceleration – Ask employer to pay bonus this year.  Sell investments with taxable gains to absorb capital loss carryover or lock-in long-term capital gain rate 15%.  Accelerate distributions of IRAs to avoid potentially higher tax rates in 2013.

Tax Deduction Changes for Individuals

  •  2011 is the last year that Mortgage Insurance Premiums will be an allowable deduction.  (IRC Sec. 163(h)(3))
  • Mass Transit Tax-free benefit: $230 in 2011 will be reduced to $125 for 2012 tax year.  (IRC Sec. 132(f))
  • Taxpayers subject to AMT will no longer be able to use personal tax credits to offset AMT in 2012.  (IRC Sec. 26(a)(2))
  • For taxpayers that itemize deductions, state and local taxes will no longer be allowed for 2012.  (IRC Sec. 164(b)(5))
  • For 2011, OTC medications are generally no longer eligible as reimbursable expenses for FSA, HSA, and MSA without a written doctor's prescription.
  • High Income Taxpayers benefit from a temporary (2 year) repeal of PEP and PEASE exemption limitations and retain full value of itemized deductions and exemptions.
  • Income limits no longer apply for Roth IRA rollovers or conversions from other retirement accounts.
  • IRA owners 70 1/2 years of age may donate up to $100,000 tax free to qualified charitable organizations, 2011 is last year.
  • 2011 is scheduled to be the last year a taxpayer can take advantage of The Tuition and Fees deduction reported on Form 1040/1040A.  Tuition and Fees may still be eligible for a tax credit via the Lifetime Learning Credit or The American Opportunity Tax Credit.

Tax Deduction Changes for Businesses

  • Small Business Stock purchased after 9/27/10 is eligible for 100% exclusion of gain on sale.  IRC § 1202
  • The carry back period for small business credits was extended from 1 to 5 years.  The Small Business Jobs Act (SBJA) allows taxpayers to use eligible tax credits to offset both regular and AMT liabilities for credits determined in the taxpayer's first tax year starting after 2009.  IRC § 38
  • Cell Phones are no longer subject to special depreciation rules under IRC § 280A.
  • SBJA increased the amount that can be expensed under IRC § 179 to $500,000 and increased the phaseout to $2,000,000.
  • For 2011, first-year bonus depreciation for certain long-lived and transportation properties is 100% for business property acquired after 9/8/10 and before 1/1/12 and placed in service before 1/1/12 (1/1/13 for certain types of property)  IRC § 168(k).
  • SBJA increased the maximum deduction for trade or business startup expenses from $5,000 to $10,000 subject to limitations.  IRC § 195

Be sure to talk with your CPA concerning tax matters as tax laws change frequently and have many restrictions.

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23 Responses to Tax Deductions and Year-End Planning Tips

  1. John@MoneyPrinciple 01/04/2012 at 3:29 pm #

    Ha ha. Our tax year starts in April. So we have to file tax returns by the end of January (can be done online and is quite straight forward and mine’s already done).

    It is actually April 6th. It used to be the Spring Equinox many centuries ago but when we evenually adopted the Gregorian Calendar, the corresponding day to March 23rd (or whenvever it was) was the 6th April. Everyone else in the world does December 31st. Trust the Brits to be different!!!!!

    Happy new (tax) year

  2. UltimateSmartMoney 12/30/2011 at 3:09 pm #

    If you can qualify, you should look into Health Savings Account. This account roll over to the following year if you end up not using all of the balance. Money in FSA disappear after the year end if you do not use it. I really like your reminder to update your W-4 every year.

  3. The Jenny Pincher 12/27/2011 at 6:12 pm #

    Ugh – I dread dealing w/ my taxes this year as I have not been organized as I usually am! This is a great list and a great reminder I need to start getting organized!

    • Paul 12/27/2011 at 6:13 pm #

      You are not alone Jenny! I don’t believe I know anyone that enjoys doing there taxes. 😉

  4. World of Finance 12/26/2011 at 10:19 am #

    I was actually thinking about taxes recently…. after the holidays comes tax season… definitely important to start planning ahead and making a list of all the tax documents you will need gathered together to begin this process.

    • Paul 12/27/2011 at 12:06 am #

      I like to have all the documents that I need so when I am ready to do my taxes I am not searching for something. 😉

      • Shaun @ Money Cactus 03/08/2012 at 6:22 am #

        Our financial year starts on July 1 in Australia, so a few months off yet. I know it sounds rather unorganised, but I keep all of my documents together in a shoe box and then pull it all out at tax time. It actually doesn’t take too long to put it all together be cause it is in the one place. Simple, but effective.

        • Paul 03/08/2012 at 8:14 pm #

          The old shoebox huh Shaun! Hey, whatever system works for you is all that matters.

  5. Aaron Hung 12/24/2011 at 9:15 am #

    About the W4, my wife files 2 and I file 0. Should I bump mine up to one and get more savings?

  6. JP @ Novel Investor 12/21/2011 at 3:26 pm #

    Looking forward to deducting blog (home business) expenses this year for the first time.

  7. Maggie@SquarePennies 12/19/2011 at 9:49 pm #

    Thanks for the reminders. It’s easy to forget during all the holiday excitement!

    • Paul 12/19/2011 at 11:45 pm #

      It is really easy to forget tax matters this time of the year!

  8. Lisa @ Cents To Save 12/19/2011 at 6:52 pm #

    I am hoping to get money back with the purchase of our new home AND our rental home. Fingers crossed!

  9. YFS 12/19/2011 at 5:23 pm #

    I hate tax time.. Ever since I got married I owed thousands of dollars at tax time. This is because my wife and I make similar money (marriage tax) and I have side income :/

    • Paul 12/19/2011 at 11:46 pm #

      Sounds like you need some tax deductions. 😉

  10. krantcents 12/19/2011 at 10:11 am #

    I pay both halves of my property tax bills and prepay my January mortgage payment each year. Of course the real impact is the first year.

  11. 20's Finances 12/19/2011 at 6:05 am #

    Yes, not looking forward to paying taxes on my hard-earned side gig money. 🙂

    • Paul 12/19/2011 at 6:33 am #

      Deductions Cory, Deductions!

    • Miss T @ Prairie EcoThrifter 12/19/2011 at 11:04 am #

      Me neither. I am going to figure out how to minimize this as best as I can. Hopefully I don’t get hit too hard.


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