End of Year Tax Planning

Shifting Income and Deductions between Years

The following business tax credits are set to expire at end of 2011.

• Research Credit. The research credit of up to 20% of qualifying research expenditures applies for amounts paid or accrued before January 1, 2012.
• Work Opportunity Tax Credit ("WOTC"). The WOTC allows a credit to employers who hire members of certain targeted groups of a percentage of up to 40% of first-year wages up to $6,000 per employee ($12,000 for qualified veterans; and $3,000 for qualified summer youth employees). Where the employee is a long-term family assistance ("LTFA") recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee.
• New Markets Tax Credit ("NMTC"). A taxpayer who holds a qualified equity investment in a qualified community development entity ("CDE") may be entitled to a NMTC of 39% of the qualified equity investment during a seven-year credit period. Under current law, the last NMTC dollar limitation is for 2011.
• Differential Wage Payment Credit for Employers. Eligible small business employers that pay differential wages can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. Differential wages are payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer. This credit will not be available for differential wages paid after December 31, 2011.
• New Energy Efficient Home Credit. An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year. The credit will not apply to homes acquired after December 31, 2011.

The following business tax deductions are set to expire at end of 2011.

• 100% Bonus Depreciation. The 100% bonus depreciation allowance applies for qualified property acquired and placed in service after September 8, 2010 and before January 1, 2012 (placed in service before January 1, 2013 for certain aircraft and long-production-period property). For qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (placed in service after December 31, 2012 and before January 1, 2014 for certain aircraft and long-production-period property), only a 50% bonus depreciation allowance will apply.
• Expensing Allowance. The maximum amount of otherwise capital expenditures that may be expensed under Code Section 179 for tax years beginning in 2010 or 2011 is $500,000 ($250,000 for qualified real property). For tax years beginning in 2012, the maximum amount will be $125,000 (indexed for inflation with 2006 as the base year). For tax years beginning in 2010 and 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $2,000,000 (the investment ceiling). For tax years beginning in 2012, the investment ceiling will be $500,000 (indexed for inflation with 2006 as the base year) and $0 for qualified real property.
• 15-Year Writeoff for Specialized Realty Assets. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property placed in service after December 31, 2011, will no longer be eligible for a 15-year depreciation write-off under MACRS. Instead, such property will have to be depreciated over 39 years.
• Enhanced Charitable Contribution Deductions. The following C corporation enhanced charitable deductions equal to the lesser of: (a) basis plus half of the property's appreciation, or (b) twice the property's basis for: contributions of food inventory that is apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards, qualified contributions of book inventory to certain public schools if certain donee certification requirements are met, or certain contributions of computer technology or equipment (software, computer or peripheral equipment, and fiber optic cable) to schools or libraries for use in the U.S. for educational purposes that are related to the donee's purpose or function will not apply to contributions made after December 31, 2011.
• Lower Shareholder Basis Adjustments for Charitable Contributions by S Corporations. A temporary tax incentive to encourage S corporations to make charitable donations of appreciated assets is available for contributions made in tax years beginning before January 1, 2012. Generally, an S corporation's charitable contribution of property provides its shareholders with a fair market value (FMV) deduction for gifts of property. In association with the charitable gift, however, shareholders must reduce their basis of shares in the corporation, thus effectively reducing the value of that deduction. Under the temporary incentive, shareholders reduce their basis in the stock of the S corporation by their pro rata share of the adjusted basis of the contributed property, rather than by the FMV of the charitable contribution that flows through to the shareholder.
• Expensing Election for Costs of Film and TV Production. Taxpayers may elect to expense certain production costs of qualified film and television productions in the U.S., but only for productions commencing before January 1, 2012.
• Expensing of Environmental Remediation Costs. Taxpayers may elect to treat qualified environmental remediation expenses that would otherwise be chargeable to a capital account as deductible in the year paid or incurred, but only if the expenses are paid or incurred before January 1, 2012.
• Empowerment Zone Tax Breaks. The designation of an economically depressed census tract as an "Empowerment Zone" makes businesses and individual residents within such a Zone eligible for special tax incentives, including: the 20% wage credit under Code Section 1396; liberalized Code Section 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment-based phaseout of expensing); tax-exempt bond financing under Code Section 1394; and deferral under Code Section 1397B of capital gains tax on sale of qualified assets sold and replaced. Empowerment Zone designations expire on December 31, 2011.

The following individual tax credits are set to expire at end of 2011.

Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance. Several other benefits (“extenders”) are also scheduled to expire after 2011:

• The state and local sales tax deduction
• The classroom expense deduction for teachers
• Non-business energy credits
• The exclusion for distributions of up to $100,000 from an IRA to charity
• A higher deduction limit for charitable contributions of appreciated property for conservation purposes
• 2% Reduction in Employee FUTA tax
• Personal tax credits allowed against regular tax and AMT
• Tax credit for energy efficient roofing
• Credit for electric drive motorcycles, three- wheeled vehicles, and
  low-speed vehicles
• Conversion credit for plug-in electric vehicles
• Enhanced credit for health insurance costs of eligible individuals
• Expansion of adoption credit and adoption assistance programs
• Credit for energy efficient appliances
• Work opportunity tax credit
• Increased AMT exemption amount
• Deduction for certain expenses of elementary and secondary school
  teachers

And Many More....

 

Alternative Minimum Tax Exemption Increase

The AMT exemption has been temporarily increased for 2011.

• From $33,750 to 48,450 for single individuals
• From $45,000 to 74,450 for married couples filing jointly and surviving spouses
• From $22,500 to 37,335 for married couples filing separately

The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.

While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.

 

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