• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year.
• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won’t create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.
• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2011.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
•  If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
•  If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012-the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012-bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year writeoff generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won’t be available for workers hired after this year.
• Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.
• If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

Work Opportunity Tax Credit (WOTC). The WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage 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. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. The term “wages” for WOTC purposes doesn’t include any amount paid or incurred for an individual who begins work after Dec. 31, 2011. (Code Sec. 51(c)(4))

New markets tax credit. Under Code Sec. 45D, a taxpayer who holds a qualified equity investment in a qualified community development entity (CDE) may be entitled to a NMTC. The credit is 39% of the qualified equity investment during a 7-year credit period. The investor may claim 5% in each of the first 3 years and 6% in each of the final 4 years. There is a national, annual limitation on the amount designated under Code Sec. 45D. Under current law, the last NMTC dollar limitation is for 2011. (Code Sec. 45D(f)(1))

Differential wage payment credit for employers. Under Code Sec. 45P, 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. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. This credit won’t be available for differential wages paid after Dec. 31, 2011. (Code Sec. 45P(f))

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 won’t apply to homes acquired after Dec. 31, 2011. (Code Sec. 45L(g))

100% bonus depreciation.The 100% bonus depreciation allowance applies only for qualified property acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain aircraft and long-production-period property). For qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (placed in service after Dec. 31, 2012 and before Jan. 1, 2014 for certain aircraft and long-production-period property), a 50% bonus depreciation allowance will apply. (Code Sec. 168(k)(1), Code Sec. 168(k)(5))

Expensing allowance. The maximum amount that may be expensed under Code Sec. 179 for tax years beginning in 2010 or 2011 is $500,000. 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). (Code Sec. 179(b))

Additionally, if placed in service in a tax year beginning in 2010 or 2011, up to $250,000 per year of qualified real property is eligible for Code Sec. 179 expensing. (Code Sec. 179(f)(1), Code Sec. 179(f)(3)) Qualified real property is one of the following types of property: (1) qualified leasehold improvement property, (2) qualified restaurant property or (3) qualified retail improvement property. (Code Sec. 179(f)(2))

15-year writeoff for specialized realty assets. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property placed in service after Dec. 31, 2011, will no longer be eligible for a 15-year depreciation writeoff under MACRS. (Code Sec. 168(e)(3)(E)(iv), Code Sec. 168(e)(3)(E)(v), and Code Sec. 168(e)(3)(E)(ix)) Instead, such property will have to be depreciated over 39 years.

Note: Future year-end planning articles will discuss in detail the year-end planning opportunities inherent in the robust depreciation and expensing rules that apply this year but may well be gone next year.

Enhanced charitable contribution deductions. The following enhanced charitable contribution rules will not apply to contributions made after Dec. 31, 2011:

• C corporation’s enhanced charitable contribution deduction 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. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can’t exceed 10% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. (Code Sec. 170(e)(3)(C)(iv))
• C corporation’s enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for qualified contributions of book inventory to certain public schools if certain donee certification requirements are met. (Code Sec. 170(e)(3)(D)(iv))
• C corporation’s enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for 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. (Code Sec. 170(e)(6)(G))

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 Sec. 1396; liberalized Code Sec. 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 Sec. 1394; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced. Empowerment Zone designations expire on Dec. 31, 2011. (Code Sec. 1391(d))

A taxpayer may claim a 30% credit for the cost of installing qualified alternative vehicle refueling property for use in the taxpayer’s trade or business (up to $30,000 maximum per year per location) or installed at the taxpayer’s principal residence (up to $1,000 per year per location). This credit won’t apply to property (except for hydrogen refueling property) placed in service after Dec. 31, 2011. (Code Sec. 30C(g)(2))

• Under the energy efficient appliance credit, for appliances produced in 2011, and depending on their specifications, manufacturers can claim a (i) $25, $50, or $75 credit for each qualifying dishwasher; (ii) $175 or $225 credit for each qualifying clothes washer; (iii) $150 or $200 credit for each qualifying refrigerator. (Code Sec. 45M)