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Mike Steele

It is the start of the holiday season and many are making their lists and checking them twice, and one thing to be sure to put on your list is to get your income tax “house” in order. Even in the short amount of time left in 2011, you can still take some steps before year-end to save future tax dollars.

Many accountants would say that in terms of taxes, December 31 might be a more important date than April 15. Extensions can be filed to avoid the April deadline, but the end of the tax year is fixed as is your tax liability, credits, deductions and income. Now is the time to do some tax planning by reviewing your tax situation and changes in tax laws and assessing what strategies may help reduce your tax liability.

On a basic level, if you do not already have one, get an experienced tax accountant. A tax accountant can find and explore every legal means to reduce your tax bill as well as be a huge asset in tax planning strategies. “We stress the individuality of tax planning with our clients,” said Michael Steele, CPA and partner with Steele Martin Jones & Company, PLC in Jackson, Tenn. “This is especially so when we deal with upper income clientele, such as physicians. Many things need to be taken into consideration in planning for the tax season, so it usually is a good idea to sit down with a tax professional to review your current situation in detail in order to formulate the strategy that is best for you.”

The 2011 tax rates stayed the same as 2010 levels due to the extension of Bush-era tax cuts, which will carry over to the 2012 tax year. The primary change expected to 2012 federal income taxes will be a slight increase in the federal income tax brackets and standard deductions. With the current political climate in the country, many areas that used to be easy tax strategies are in a state of flux.

“With capital gains and dividend taxes continuing to be taxed at a maximum rate of 15 percent, it may be a better idea to accelerate taxable gains to take advantage of today’s rate,” said Steele. “This benefit can allow investors to keep more of their gains. It also is possible to defer gains on some types of sales by using a technique called a tax free exchange of like kind property, also known as a Sec. 1031 exchange. This complicated procedure can be a great tax-saving tool.”

“Due to the volatility in the security markets, you may have investment losses that you want to warehouse for use at a later date,” Steele added. “This is accomplished by selling your securities or mutual funds that have gone down in value. The funds are then reinvested in different but similar securities. The losses generated from the sales, which cannot fully be utilized in the current year, can be carried forward to apply against future gains.”

Deferring income until next year or accelerating deductions into this year is also a strategy that can be used if the circumstances warrant. For upper income professionals who anticipate an increase in their future taxable income, it may be a better idea to reverse that strategy, and take more income now and pay a lower tax rate, he said.

The end of the year is also a good time to look at your annual contributions to your retirement plan. “Check to see that you have contributed the maximum allowed into your 401K retirement plan,” Steele said. “If you do not have a retirement plan, establish one by the end of the year and contribute as much as you can. This saves taxable income immediately, and the earnings on the portfolio can be deferred until the funds are withdrawn at a future time.”

Estate and gift-tax thresholds have been increased to $5 million for an individual or $10 million for a couple with a top rate of 35 percent. But these new provisions are scheduled to expire at the end of 2012, meaning a lot of revised estate planning for families. “Estate planning and gifting is also an area that is headed into a state of fluctuation with some politicians wanting estate taxes to go away and some wanting to reduce the limit on the exemption from five million to one million,” said Steele.

“With not knowing what Congress will do, timing of transactions can be extremely important for a client. This element of uncertainty can make tax planning tricky as you have to work under the current law while trying to position a client for what may happen in the future, without knowing the changes that may be out there due to the political climate of the country.”

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