There is still time to minimize your 2011 tax liability. Here are a number of steps you might take by year-end, such as deferring income, accelerating deductions and capital gains planning.
Deferring Income
You may want to hold off these transactions:
· If you are planning on selling an investment this year on which you have a gain,
· If you are expecting a bonus at year-end, you may be able to defer receipt of these funds until January. This allows you to defer tax payments (other than the portion normally withheld) until the following year.
· If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
· If you're self-employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients or customers until the end of December.
Accelerating Deductions
You may want to do the following is your cashflow situation enable you:
· Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
· Pay your entire property tax bill, including installments due in year 2012, by year-end. This does not apply to mortgage escrow accounts.
· Try to bunch "threshold" expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
Here is something to think about. In most cases, credit cards charges are considered paid in the year of the charge regardless of when you pay on the cards, except for store revolving credit card.
Tip: a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2011. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Tip: Deferring income into 2012 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, generally because of much-reduced income or much-increased deductible expenses.
Tip: It may pay to accelerate income into 2011 if you think your marginal tax rate will be much lower this year than it will be next year.
Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
