Individual year-end tax strategies should account for the breaks that are set to expire come January 2012. Mainly, accelerate the deductions associated with these breaks to get the full benefit of them before it’s gone in 2012. Find out which tax breaks are set to expire and how to prepare.
Extension of the the Payroll Tax Cut is Still in Limbo
Recently, the House passed the payroll tax cut extension to keep social security tax at 4.2% vs. 6.2% on the first $106,800 in wages. However, we all know that it takes two (the House & the Democratic controlled Senate) to tango when it comes to passing legislation. This will be difficult since the payroll tax legislation also included big spending cuts and a clause to move forward with construction of an oil pipeline from Texas to Canada. There’s not much we can do to prepare as individual taxpayers other than wait to see what happens but it would be wise to reevaluate your budget for both scenarios.
AMT Tax Reverts to Back to, “No Tax Credits Allowed”
Taxpayers that are subject to AMT in 2011 are able to reduce their tax liability with offsetting personal tax credits the same way as it’s applied to regular tax (IRC Sec. 26(a)(2)). However, in 2012, personal tax credits can longer reduce AMT. What’s more, the AMT tax exemptions are scheduled to decrease from $74,450 for joint filers and $48,450 for singles to $45,000 and $33,750, respectively. This means more taxpayers will be subject to AMT in 2012. The strategy to minimize the impact is to accelerate AMT preferences and income now in 2011.
Other Tax Deductions Set to Expire
The state and local sales tax itemized deduction is step to expire which can be significant for those taxpayers that planned to make significant purchases in 2012 (IRC Sec. 164(b)(5)). Those earning less than $100,000 that were able to deduct their mortgage insurance premiums in 2011 will not be able to do the same next year (IRC Sec. 163(h)(3)). This will be particularly hurtful to low income families that have difficulty affording homes and insurance.
Those commuters that benefit from the $230 per month mass transit tax free fringe benefit will see that amount decrease to $125 in 2012 (IRC Sec. 132(f)).
Donating IRA Distributions up to $100,000 without Tax Consequences
Those over the age of 70 1/2 can still donate up to $100,000 to charities with funds from their IRA. The tax-free transfer allows those folks to reduce their taxable income and thus their year end tax bill. In case you forgot, IRA holders 70 1/2 or older, are required to make minimum distributions (RMDs) and this charitable donation would fulfill that requirement. This transfer doesn’t allow them to claim a tax deduction for the contribution but it could fulfill a requirement to tithe (support your church). Keep in mind that $100,000 is the limit, you could donate $5,000 from your IRA. But, this too is set to expire next year.
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