Year-end tax planning these next several weeks will be refreshingly straightforward for a change.
The past few years have been fraught with so much uncertainty about income tax rates, estate taxes and expiring deductions that planning wasn't easy. A year ago, for instance, Congress waited so long to act on expiring tax breaks that the IRS couldn't update all its systems in time for the start of the tax season. Millions of taxpayers had to wait until February to get their returns processed.
"It was a tumultuous year, as many of them seem to be," says Mark Steber, chief tax officer with Jackson Hewitt Tax Service.
But — cross your fingers — there isn't any legislation on the horizon that's expected to gum up tax strategizing this year.
Even so, you can't assume your return will be similar to the last one you filed, Steber says, especially if you underwent a major life change. You should review deductions and credits to see if you might qualify for them now even if you didn't before.
For example, if you lost your job or found a new one paying much less, Steber says, your income might be low enough that you're eligible for certain deductions.
Here are some tax moves to consider before the end of the year:
Disaster relief This has been a big year for natural disasters nationwide. Marylanders weathered an earthquake and a hurricane/tropical storm within a single week in August.
For any damage to property that's not covered by insurance, you can deduct losses on your federal return, says Melissa Labant, technical manager with the American Institute of CPAs. The IRS has a formula to calculate losses, and the amount that exceeds 10 percent of adjusted gross income can be deducted on an itemized return.
But you don't have to wait until next year to claim the loss on your taxes, adds Barbara Weltman, author of "J.K. Lasser's 1001 Deductions & Tax Breaks."
If your area was declared a federal disaster site, she says, you can amend your previous return and claim the losses on it and get your refund earlier. "You will have some money to help you rebuild," she says.
Harvesting gains, losses "Because it's been such a wild year on Wall Street, you need to pay attention to what's going on in your portfolio," Weltman says.
A tried-and-true tax strategy is to offset any capital gains on the sale of investments with any capital losses. If you have more losses than gains, you can use up to $3,000 of excess losses to offset ordinary income. And any losses above that can be carried forward to offset future gains.
Charitable giving You can deduct donations if you file an itemized return. It doesn't have to be cash.
"It's a great time to clear out closets and cabinets to get rid of stuff in good condition that you don't use anymore — and get a deduction," says Jennifer Rempe, lead tax research analyst with the Tax Institute at H&R Block.
This is an especially good year for high-income households to make charitable donations, Labant says. Previously, charitable deductions were reduced as income went up, she says, but this year there is no phase-out for high earners.
But, tax experts warn, the IRS is watching to make sure donors have the proper documentation.
For small donations — cash and property — you will need a bank statement or a written receipt that shows the name of the charity, date of the gift and amount. Donations of $250 and up require a letter from the charity acknowledging the gift. And for property donations of more than $5,000, you generally need an appraisal.
Use IRA to give This is the last year for those age age 701/2 and older to get a tax break for donating up to $100,000 directly from an IRA to a charity, says Mark Luscombe, principal analyst with CCH, an Illinois provider of tax information.
You don't get a charitable deduction, but the donation counts toward the required minimum distribution that older IRA owners must make annually. Charitable distributions also won't count as income on tax returns, which will lower your adjusted gross income. With a lower AGI, you might be eligible for tax breaks that you didn't qualify for before, Luscombe says.
Energy credit If you haven't taken advantage of a tax credit for making "green" improvements to your home, such as insulation or energy-efficient windows, you have until the end of the year to do so. The expiring credit is worth up to $500.
Retirement If you haven't maxed out on your 401(k) contributions, it's not too late to boost your contributions in the last few weeks of the year, Rempe says.
Not only is this good for your future retirement, but contributions reduce the amount of income subject to tax. (Your 401(k) money, though, will be taxed when you withdraw it in retirement.)
Depending on your income or whether you have a retirement plan at work, you may be able to deduct contributions to a traditional IRA. You have until the tax deadline — April 17 next year — to make an IRA contribution for 2011. (The deadline is extended by two days because the usual deadline falls on a weekend followed by a holiday.)
Roth conversions Many people took advantage last year of a change in the law that allowed high-income workers to convert a traditional IRA to a Roth IRA, which permits tax-free withdrawals in retirement. A conversion, though, triggers a tax bill on the amount being converted.
For conversions done last year only, taxpayers had the option of splitting the tax bill over their 2011 and 2012 returns.
"This will be the first year they have to pay the tax on that," says Bob Meighan, vice president of TurboTax. "Make sure you are aware of it and have the money available when it becomes due."
Look ahead At the end of next year, many Bush-era tax cuts are set to expire. Congress is expected to wait until after the election to act.
Next year will be the "tsunami of tax-law changes," Jackson Hewitt's Steber says, adding that it likely will mean higher taxes in 2013.
One new tax on the horizon: a 3.8 percent Medicare tax on investment income that's part of the health care reform act, says CCH's Luscombe. The tax will apply to singles earning more than $200,000 and couples with incomes over $250,000. Capital gains tax rates also expire that year and could rise from 15 percent to 20 percent for these households, too, he says.
With that in mind, Luscombe says, you might consider moving money into tax-free municipal bonds or a Roth IRA to avoid taxes on gains.