2011 Year-End Tax Planning Letter

Dear Clients and Friends:

A word of warning: The federal government is out of money. The IRS has changed its tactics and is becoming much more aggressive, pursuing taxpayers and situations they avoided in the past. The number of clients audited in our office this year has quadrupled and they are becoming more inflexible in negotiations. WARNING: if you have rental property understand that the IRS will be looking much closer at your return. Also, if you are an S Corp, make sure you pay yourself a reasonable salary (we will discuss this with you when you bring your information in).

If you are a business owner, are self-employed, or deduct auto use for work purposes, please view this video at http://tinyurl.com/3jjtq9m. It is about the documentation you must have if you are audited for auto use. This short video is done by W. Murray Bradford, CPA, one of the most brilliant tax consultants in the world, and someone I reference on a regular basis.

In these difficult times, tax planning is harder than ever. This is especially true as the end of 2011 approaches for the following reasons:

First, the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010,” signed late last year, creates a slew of new tax incentives for individual and business taxpayers. It also extends several tax breaks and provides estate- and gift-tax planning opportunities. However, certain provisions in this new law will expire in the near future.

Second, other recent laws—including Obamacare—may have an impact on your situation. Year-end tax planning may also be affected by new directives and guidelines issued by the IRS.

Third, the specter of possible tax “reform” always creates an uncertain environment. If Congress enacts tax legislation at the end of 2011, it could require some last-minute scrambling. IF THIS HAPPENS WE WILL KEEP YOU INFORMED.

Keeping these key points in mind, we have done our best to prepare you for anything you may have to do before year-end to affect your 2011 taxes.

Throughout this letter, take note of various tax actions that may be available. For your convenience, the letter has been divided into the following three sections:

Tax Planning for INDIVIDUALS (People)
Tax Planning for BUSINESSES (Corporations, partnerships)
Tax Planning that would affect your FINANCES (Your Money!)

Be aware that the year-end planning ideas discussed within this letter are general in nature and are intended only to provide an overview. We suggest that you review your situation with us before you take any action.

I. INDIVIDUAL TAX PLANNING

Save Taxes with Charitable Donations

Normally, you can deduct the full amount of your cash contributions to charity, as long
as you get a receipt. And, you may be able to deduct the fair-market value of donated property that has appreciated in value if you have owned the property longer than one year. For example, if you have a piece of art you inherited from your Aunt Ethel that you despise, but is worth more than when you got it, you can donate it to charity for the increased value!

IMPORTANT Year-end actions: Complete donations before January 1, 2012, to lower your taxes for 2011. If you are planning to give something next year to a charitable organization, consider donating it this year. If you make a charitable gift by credit card and the charge is posted by December 31, 2011, it is currently deductible, even if you actually pay off the charge in 2012.

LOWER TAXES TIP: Deductions for donations of used clothing and other household items are generally available for those items in “good condition.”

***** CONTACT US AT info@allancpa.com TO GET OUR IRS APPROVED LIST OF DEDUCTIONS FOR NON-CASH CONTRIBUTIONS as constructed by the Salvation Army. This handy and comprehensive worksheet will help you turn junk into gold by pricing out all the various items you have around the house that you no longer want or need. Use this worksheet as an itemized list to calculate your donation of items and then have the charity sign it. So many of our clients throw tax dollars away by not itemizing these kinds of donations, instead donating articles “by the bag,” which the IRS DOES NOT RECOGNIZE FOR YOUR TAX RETURN.

Save Taxes with a Residential Energy Credit

The tax law provides a 10% tax credit, up to a maximum of $500, for certain energy-saving installations in the home. The list of qualified expenses ranges from insulation to energy-efficient central air conditioning units and furnaces. Previously, a maximum credit of $1,500 was allowed for 2009 and 2010.

IMPORTANT Year-end action: Make energy-saving improvements before January 1, 2012. Unless this tax break is extended again by Congress, it will expire on December 31, 2011.

LOWER TAX TIP: The maximum $500 credit must be reduced by any credits claimed under the prior rules in 2009 and 2010. And, you will need a receipt by the contractor or store that it qualifies for the credit!

Save Taxes with a Retirement Contribution

Many of our clients overpay taxes by not maxing out their 401K or 403B plans at work. At the very least you should contribute up to whatever the company is matching. Even without a matching program, Uncle Sam is pitching in for your retirement whatever your tax bracket is – a free gift for your retirement! The same planning applies to clients who don’t have IRAs. You can open and contribute to a Traditional IRA before 4.15.2012 and take it on your 2011 return.

Example: You are in the 25% tax bracket. You call HR before the end of the year and ask if you can add $5,000 to your 401K before 12.31.11. Tax savings = $1,250.

Example: You withdraw $5,000 from savings and stick it in an IRA on April 14, 2012. You have just saved $1,250 in taxes if you are in the 25% tax bracket.

The money you place in a qualified retirement plan is not locked away until retirement! You still have access to it if you need it on an emergency basis (paying taxes and penalties).

IMPORTANT Year-end action: Max out your 401K by 12.31.11 or IRA by 4.15.12

Save Taxes with Timely Estimated Tax Payments

If you do not pay enough income tax through quarterly installments or income tax withholding, you may be assessed an “estimated tax penalty.” But no penalty applies if payments equal at least 90% of your current liability or 100% of the prior year’s tax liability. The 100% threshold is increased to 110% if your adjusted gross income (AGI) for last year exceeded $150,000.

IMPORTANT Year-end action: Make sure to be at least 90% paid in for 2011 taxes or 100% paid in of 2010 taxes before 1.15.2012. Typically, it is easier to meet the requirement based on the prior year’s tax liability. Call us to discuss.

Miscellaneous Tax Tips for Individuals

The tax law allows you to deduct annual unreimbursed medical expenses only in excess of 7.5% of your AGI for 2011 (scheduled to increase to 10% in 2013). If you are close to the 7.5% mark or already over it, schedule non-emergency medical and dental visits before the end of the year.
Consider consolidating outstanding personal debts into a home equity debt. Interest on personal debts (like credit cards) is not tax-deductible, but you may deduct mortgage interest paid on the first $100,000 of home equity debt, no matter how the proceeds are used. Caution: The debt must be secured by your home, so use this technique carefully.
Make sure to pay your real estate taxes in 2011 to deduct them for 2011! Some clients forget to pay and wait until the deadline the following year, thus losing the tax deduction for this year.
If you are a parent of a child in college, you may claim a tuition deduction or one of two higher education credits for qualified expenses paid in 2011. However, these tax benefits are phased out for high-income taxpayers.

II. BUSINESS TAX PLANNING

Bad Debt Deductions

Since we are in a terrible recession, customers or clients may be slow to resolve past-due accounts. At least your business may be able to salvage some tax relief.

IMPORTANT Year-end action: Step up your collection activities. If you still do not receive payment, you may be able to write off an unpaid debt as a business bad debt that is “worthless.”

LOWER TAXES TIP: Keep detailed records of your efforts—such as dunning letters, telephone calls, e-mails and pursuits by collection agencies—in your files. This documentation can help support deductions based on the worthlessness of the debt.

Depreciable Property

Do you need to buy furniture or equipment? Under Section 179 of the tax code, a business may deduct the entire cost of qualified assets placed in service in the current year, up to a maximum amount. The deduction begins to phase out above an annual threshold. These Section 179 limits have been enhanced in recent years as follows:

Tax year	Deduction limit	Phase-out threshold
2010–2011	$500,000	$2 million

IMPORTANT Year-end action: Place assets in service before January 1, 2012, to maximize deductions for 2011. Without Congress’ intervention, the maximum deduction is scheduled to decrease to $125,000 with a $500,000 phase-out threshold in 2013.

LOWER TAXES TIP: The Section 179 deduction may be combined with 100% bonus depreciation in 2011 for an unprecedented write-off of qualified business assets.

Miscellaneous Tax Tips for Businesses

Purchase routine business supplies before the end of the year. A company can generally deduct the cost in 2011—even if the supplies will not be used until 2012.
Losses claimed by S corporation shareholders are limited to the basis in the stock plus outstanding debt. Thus, shareholders might make a capital contribution or lend money to the corporation before year-end to increase the basis for loss deduction purposes. Call us to discuss if you think it applies to your situation.
A company can deduct 100% of business travel costs and 50% of entertainment and meal expenses. To increase your current deduction, accelerate trips planned for 2012 into 2011. Note: A company can deduct 100% of the cost of a holiday party if the entire workforce is invited.
Get a new business up and running before 2012. For 2011, you can claim a maximum first-year deduction of $5,000 of qualified start-up costs.
If you buy an SUV or van for business driving, you may be able to claim a first-year deduction of up to $25,000. The usual “luxury car limits” don’t apply to certain heavy-duty vehicles.
Under the 2010 health care law, a qualified “small business” may claim a tax credit of up to 35% of the cost of health insurance for employees. But the credit begins to phase out for employers with more than ten employees with average annual wages of more than $25,000.

III. FINANCIAL TAX PLANNING

Sales of Stocks and Bonds

Tax-smart investors can use capital losses from securities sales to offset capital gains and vice versa.

A capital loss in 2011 may offset capital gains plus up to $3,000 of ordinary income. Any remainder is carried over to next year. Under current law, the maximum tax rate on long-term capital gains (i.e., on assets owned for more than a year) is 15% and 0% for certain low-income taxpayers.

Also, if you have capital gains for the year, sell loser stocks to soak up the capital gains, creating a net tax effect of zero.

IMPORTANT Year-end action: When it makes sense, take losses from securities sales before 2012 to avoid tax if you are currently showing a net capital gain. If you really love the stock and still want it in your portfolio, wait 31 days and buy it back, avoiding the wash-sale rules.

LOWER TAXES TIP: The 15% and 0% maximum tax rates for long-term capital gains are scheduled to increase to 20% and 10%, respectively, in 2013. But this may be changed by future legislation.

Roth IRA Conversions

There are two main types of Individual Retirement Accounts (IRAs): traditional IRAs and Roth IRAs. In brief, contributions to traditional IRAs may be tax-deductible, but tax deductions are phased out for “active participants” in employer-sponsored retirement plans (401K and 403B). Distributions are taxed at ordinary income rates. Conversely, Roth IRA contributions are never tax-deductible, but qualified distributions from a Roth that is in existence five years are 100% tax-free.

IMPORTANT Year-end action: Consider converting funds in a traditional IRA to a Roth. The transfer is currently taxable, but can provide future tax-free benefits. This is especially attractive if you are going to be in a lower tax bracket in 2011, as converting now will save you big tax dollars later if you decide to convert in a year when your tax rate is higher.

Unfortunately, a one-time tax break for Roth conversions is no longer available. For 2010 only, taxable income from a conversion could be split evenly over the following two years.

LOWER TAXES TIP: The contribution limit for both traditional and Roth IRAs in 2011 is $5,000 ($6,000 for those age 50 or older). This limit applies to any IRA combination (but Roth contributions are restricted for high-income taxpayers).

Required Minimum Distributions

As a general rule, you must receive “required minimum distributions” (RMDs) from qualified retirement plans and IRAs once you have reached age 70½. The amount of the distribution is based on special life expectancy tables.

IMPORTANT Year-end action: Make sure you take the RMD before January 1, 2012. If you fail to do so, you may be assessed a penalty equal to 50% of the required amount.

LOWER TAXES TIP: If you are still working and not a 5%-or-more owner of the employer, you can postpone RMDs from the employer’s qualified plan until retirement, but not for any IRAs.

Estate and Gift Taxes

During the last decade, the top estate-tax rate gradually decreased from 55% to 45% while the estate-tax exemption increased from $1 million to $3.5 million, before the estate tax was generally repealed for 2010. Now a generous estate-tax exemption of $5 million, with a top estate-tax rate of 35%, is available through 2012. The chart below summarizes the recent progression.

Tax year	Top estate-tax rate	Estate-tax exemption
2009	45%	$3.5 million
2010	Repealed	Not applicable
2011	35%	$5 million

IMPORTANT Year-end action: Review your estate plan with a professional financial adviser. Frequently, it will make sense to reduce your taxable estate with lifetime gifts to family members. The annual gift-tax exclusion allows you to give each recipient up to $13,000 in 2011 without paying any gift tax ($26,000 for joint gifts by a married couple).

LOWER TAXES TIP: The gift-tax exclusion applies annually. Therefore, you can give the maximum tax-free gift to someone in December 2011 and give the maximum to the same person in January 2012. Therefore, you and your spouse could gift $52,000 to one person over 2 days

Miscellaneous Financial Tax Benefits

When it makes sense, you may defer tax on investment income by acquiring certificates of deposit (CDs) and Treasury securities that mature next year. Generally, the income from these investments is not taxable until the year it is received.
It is often beneficial tax-wise to sell mutual fund shares before the fund declares dividends (the “ex-dividend date”) generally in the 4^th quarter, and to buy shares after the date the fund declares dividends
Consider investments in dividend-paying stocks. As with long-term capital gains, the maximum tax rate on qualified dividends received in 2011 is 15% (0% for low-income taxpayers).
Maximize deductions for vacation home rentals. Generally, you may claim a loss only if your personal use does not exceed the greater of 10% of the time the home is rented out or 14 days. However, you may qualify for loss deductions if you are an “active participant” in the rental activity. This tax break is phased out for high-income taxpayers.

CONCLUSION

As I may have mentioned to you in the past, the ways for middle class taxpayers to save taxes are limited. When you are a Kennedy, you employ teams of CPAs and tax attorneys to maneuver your money into special situations within the tax code carved out by politicians for high income people (like themselves).

This year-end tax-planning letter is based on the prevailing federal tax laws, rules and regulations. Of course, it is subject to change, especially if major tax reform provisions are enacted before the end of the year.

Finally, remember that the letter is intended only as a general guideline. Your personal circumstances will likely require greater examination. We will be glad to schedule a meeting with you to provide assistance with your tax-planning needs.

Best regards,

Allan Boress and Jonni Hanegan

Allan S. Boress, CPA, FCPA

Jonni Marie Hanegan

This year-end planning letter is published for our clients, friends and professional associates. It is designed to provide accurate and authoritative information with respect to the subject matter covered. IRS Circular 230 requires us to inform you that the information contained in this letter is not intended or written to be used for the purpose of avoiding any penalties that may be imposed under federal tax law and cannot be used by you or any other taxpayer for the purpose of avoiding such penalties. Before any action is taken based on this information, it is essential that competent, individual, professional advice be obtained.

Allan S. Boress and Associates, PA

150 Terra Mango Loop – 465 Plaza Drive

Orlando, FL 32835 – Eustis, FL 32726

(407) 233-6844 – (352) 589-6444

info@allancpa.com