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Steps toward year-end tax planning

Tax time commeth

I can’t believe I’m writing a post on taxes the day before Thanksgiving. (I still need to go shopping tonight, mostly for spices like paprika and pepper.) 

Still, it’s going to be December soon, and that means the clock is ticking on any last-minute savvy tax moves for 2011. 

Here’s a brief list of what to consider, courtesy of Percy Bolton, a certified financial planner in Pasadena, Calif.

The window of opportunity closes on Dec. 31. I’ve edited down the suggestions for space. But if one or more applies to you it’s worth researching in more detail. By the way, income tax rates -- as well as capital gains and dividends -- will remain the same in 2011 and 2012. 

Remember, the devil is always in the tax details.

Deferring income to 2012 means postponing taxes: Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. ... You may be able to put off paying income tax on the deferred dollars until next year. 

Paying deductible expenses sooner may help you in 2011: Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012. 

Is AMT a factor? Let’s hope not. If you're subject to the alternative minimum tax (AMT), special rules apply. ... If you've been subject to the AMT in the past, or think that you might be for 2011, you'll want to make sure that you understand how the AMT rules might affect you.

Employer-sponsored retirement contributions: Retirement plans like a 401(k) offer an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. ... The window to make 2011 contributions to your employer plan closes at the end of the year. (You have until April 17, 2012 to make your 2011 IRA contributions.)

Special distribution requirements at age 70½: Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It's important to make withdrawals by the date required -- the end of the year for most individuals. The penalty is steep for failing to do so.

Depreciation and expense limits to drop for business owners and the self-employed: If you're a small-business owner or a self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.

Last chance to deduct energy-efficient home improvements: This is the last year you'll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). ... However, there's a lifetime credit cap of $500 ($200 for windows). So, if you've claimed the credit in the past -- in one or more years since 2005 -- you're only entitled to the difference between the current cap and the amount you've claimed in the past. 

Other expiring provisions: Barring additional legislation, this is the last year that you'll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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