With the uncertainty of our future tax landscape, it has become increasingly difficult to plan for minimizing income taxes. However, individuals can take steps to seize full advantage of the current tax environment and save taxes now or set a plan in motion to save taxes in the future. The following ideas may help in your year-end analysis:
- With stock market values dipping down periodically, now may be a good time to convert a traditional Individual Retirement Account (IRA) to a Roth IRA. Funds from a Roth IRA can be withdrawn tax free if certain requirements are met, whereas, taxes on funds from a traditional IRA are simply deferred until withdrawn, generally during retirement. Note that taxes on the traditional IRA must be paid at the time of conversion. However, if the values are low, you can convert now at a low tax cost and all future appreciation and earnings in the Roth IRA can be withdrawn tax free (after meeting certain requirements).
- If you are age 70 ½ or older, you can make charitable contributions directly from an IRA until the end of 2011 and exclude that IRA distribution amount from your income. However, you cannot take the IRA distribution as a charitable deduction too. This technique lowers your AGI (adjusted gross income), which drives some of the limits on itemized deductions.
- Increase elective deferrals and contributions to qualified retirement plans.
- If you participate in a qualifying high deductible health plan, make or increase contributions to a health savings account. These contributions can be deducted in adjustments to gross income, thereby decreasing AGI and limits on certain itemized deductions. Withdrawals from the HSA are tax free if used for qualified medical expenses.
- Gift appreciated stock to charities. You receive a double tax benefit because you can deduct the fair market value of the stock as an itemized deduction and avoid paying capital gains tax on the disposition of the stock.
- Consider gifting depreciated property to family members. This accomplishes several goals by shifting the property at a lower gift tax cost or taking advantage of the higher current gift exclusion. Plus, if the recipient is in a lower tax bracket and not subject to the “kiddie tax,” the family will pay lower overall income taxes.
- Consider the use of charitable gift annuities in which you transfer assets to a charitable organization and they, in turn, provide an income annuity to you for a stated time. You receive a current charitable deduction for a portion of the value of the asset and will receive an income stream over the annuity period.
These are just a few of the many tax planning moves that you can make before year end to lower your tax bill for 2011. Please contact one of the professionals in our Tax Strategies group to discuss the techniques that work best for your individual situation.
For questions about this topic or to discuss your company's needs, please contact us at Email or 215.441.4600.