The holiday madness is upon us. But, between shopping and holiday party planning, taxpayers can still take steps to save on their 2011 taxes. There are a few last-minutes opportunities to consider by December 31. For guidance we turned to Frank Degen, a self-employed practitioner in Setauket, Long Island. He has been an Enrolled Agent since 1984. You probably recognize his name. He's answered Marketplace Money tax questions for us, including last April. Here are his suggestions:
1. Charitable contributions made by check or credit card are deductible on the 2011 Schedule A (for those who itemize) as long as they are made on or before December 31. Though the check may not clear or the charge card may not be paid until 2012, you can still take the deduction. Charitable gifts of appreciated stock (held more than one year) are deducted at the fair market value on the day of the gift--rather than sell the stock; pay the tax; and then donate the money, simply gift the stock. If the stock has gone down in value, do the opposite--sell the stock, take the tax loss and then donate the money.
2. Sole proprietors (including employees who also have a part-time business) have a wonderful opportunity to open a solo 401K. The plan must be opened by December 31 but the funding of the plan can be done in 2012.
3. The generous residential energy credit ($1,500) offered in 2010 has been reduced to $500 for 2011. This is a tax credit and can reduce your tax liability dollar for dollar. There are varying limitations, depending on the energy saver. The most common purchases of insulation, doors and windows generate a credit of 10% of the cost capped at the $500 maximum credit (windows are capped at $200). Complete the purchase by December 31.
4. Offset capital gains realized from stock sales in 2011 by selling stocks that have losses. Capital losses and gains are netted and then an additional $3,000 of losses can be used to offset ordinary income. If those stocks with realized losses look attractive for the future, you can buy more shares in 2012 but be aware of the "wash sale" rules which require you wait 30 days to re-purchase the stock in order to recognize the loss.
5. Final suggestion: Make a New Year’s resolution to never look for end-of-the-year tax tips again. You should be consulting your enrolled agent (EA) or other tax pro on a year-round basis. Your EA can help you make tax savvy decisions throughout 2012.
In preparing 2011 tax returns during 2012, here are a few tidbits:
- Tax returns will be due April 17 this year. There are two extra days to file because April 15 is a Sunday and April 16 is Emancipation Day (a legal holiday in the District of Columbia).
- Don’t look for Schedule M on your 2011 return. The "making work pay" credit expired after 2010.
- Capital gains and losses will be reported on a new Form 8949 and then carried to the familiar schedule D.
- There is a new registration regime for tax preparers instituted by the IRS. There is a new classification--registered tax return preparer. These individuals will be required to pass a minimum competency test and will have limited practice rights. Enrolled agents, certified public accountants and attorneys have demonstrated more than minimum competency and have unlimited practice rights. Be judicious in choosing your tax practitioner.