5 Tax Saving Ideas to Do Now!

By Mark Sprenger

 As Benjamin Franklin observed over 200 years ago, “In this world nothing can be said to be certain except death and taxes”

Taxes are not going to go away, and no matter which political party is in power they will likely change. These changes however, will not affect the tax laws and rates in effect for 2011. Here are five ideas to lower your 2011 tax bill.

1.      Maximize your allowable contributions to qualified retirement plans and individual retirement accounts (IRAs). 

Not only will you lower your taxable income, but you will be doing something far more important, saving for your retirement. If you are a participant in a 401k or 403b Plan, you can contribute up to $16,500 in 2011 or up to $22,000 if you are over age 50.  If you have an IRA and sufficient earned income, you can contribute up to $5,000 or up to $6,000 if you are over 50.

 2.      Sell securities worth less than what you paid for them before year end.

The resulting capital loss may be utilized to offset capital gains that you may have incurred from sales earlier in the year, including short-term capital gains for securities held less than a year, that are taxed at the higher ordinary income tax rates.  Note:  there are special “wash sale” rules that prevent you from selling securities at a loss to offset gains and then immediately buy the security back.  Should your capital losses exceed your capital gains, you get to deduct up to $3,000 ($1,500 if married filing separately) against your higher taxed ordinary income (from wages, self-employment, etc.) with any excess losses carried forward to 2012 and beyond to shelter future capital gains. 

 3.      Make charitable donations up to $100,000 directly out of your IRA.

If you own an IRA and have reached age 70 ½, you can make your charitable (the charity must be a public charity approved by the IRS) donations up to $100,000 directly out of your IRA.  Such Qualified Charitable Distributions (QCD) are federal income tax-free, meaning that you do not have to report the IRA distribution as taxable income. This deduction is not available on your Wisconsin income tax return.  In Wisconsin you must add the QCD back into your federal adjusted gross income and claim the charitable donation as an itemized deduction credit.

 4.      Defer income to 2012.

If you are a self employed, cash basis taxpayer or a sub-S corporation owner, you can defer taxable income until 2012 by waiting to send out invoices until very late in the year.  Note: it is not advisable to defer income if the next year’s tax rate may be higher (in 2013, absent Congressional action, the top two federal income tax rates will increase from 33% and 35% to 36% and 39.6%, respectively). 

5.      Increase your 2011 itemized deductions.

By making your mortgage payment due in early January in late December, by paying the additional Wisconsin income tax that you are likely to owe in April 2012 before year-end, by paying all your 2011 property taxes before year-end, and by moving charitable deductions that you would make in early 2012 to before year-end.  If you are temporarily short on cash, you can charge the charitable donation to a credit card as it will be deductible in the year charged, not when the credit card bill is paid in 2012.

These are a few actions that you can take to lower your 2011 tax bill and in today’s tough economic times, a few extra dollars in your pocket rather than the government’s can be a very desirable outcome.

Disclaimer: Before making any tax decisions, seek advice from a financial and tax advisor who will take into account your specific needs and circumstances and will carefully consider the risks and consequences associated with such decisions.