Last minute
year-end tax-saving moves for individuals

Although there are only three weeks left to go before the year
ends, it's not too late to implement some planning moves that can improve your
tax situation for 2011 and beyond. This memo reviews some actions that you can
take before Dec. 31 to improve your overall tax picture.

Make HSA contributions. A  taxpayer who became an eligible individual
under the health savings account (HSA) rules on December 1, 2011, is treated as
having been an eligible individual for the entire year. Thus, he may make a
full year's deductible-above-the-line contribution for 2011. That means a
deduction of $3,050 for individual coverage, and $6,150 for family coverage
(those age 55 or older get an additional $1,000 catch-up amount).

Nail down losses on stock while
substantially preserving your investment position. A
taxpayer may have experienced paper losses on stock in a particular company or
industry in which he wants to keep an investment. He may be able to realize his
losses on the shares for tax purposes and still retain the same, or
approximately the same, investment position. This can be accomplished by
selling the shares and buying other shares in the same company or another
company in the same industry to replace them. There are several ways this can
be done. For example, an individual can sell the original holding, then buy
back the same securities at least 31 days later.

Convert a regular IRA to a Roth IRA.
Individuals who believe a Roth IRA is a better strategy than a traditional IRA,
and want to remain in the market for the long term, should convert
traditional-IRA money invested in beaten-down stocks (or mutual funds) into a
Roth IRA if eligible to do so. Note, however, that such a conversion shouldn't
be done without considering the individual's overall tax situation. Even at
depressed market levels, a 2011 rollover or conversion still will increase a
taxpayer's AGI, possibly propelling him or her into a higher tax bracket, and
diluting (or eliminating) those tax breaks that have AGI-based phaseouts or
“floors.”

Recharacterizing
a traditional IRA to Roth IRA conversion. If an individual
converted assets in a traditional IRA to a Roth IRA earlier in the year, the
assets in the Roth IRA account may have declined in value. If things are left
things as-is, the individual will wind up paying a higher tax than is
necessary. However, there's a way to back out of the transaction, namely by
recharacterizing the rollover or conversion. This involves transferring the
converted amount (plus earnings, or minus losses) from the Roth IRA back to a
traditional IRA via a trustee-to-trustee transfer. The individual can later
reconvert to a Roth IRA.

Accelerate deductible contributions.
Individuals should keep in mind that charitable contributions and medical
expenses are deductible when charged to their credit card accounts (e.g., in
2011) rather than when they pay the card company (e.g., in 2012).

Solve an underpayment problem. An
individual who expects to be underwithheld for 2011 should consider asking his
employer—if it's not too late to do so—to increase income tax withholding
before year-end. Generally, income tax withheld by an employer from an
employee's wages or salary is treated as paid in equal amounts on each of the
four installment due dates. Thus, if an employee asks his employer to withhold
additional amounts for the rest of the year, the penalty can be retroactively
eliminated. This is because the heavy year-end withholding will be treated as
paid equally over the four installment due dates.

Accelerate big ticket purchases into 2011
to get sales tax deduction. Unless Congress acts this year
or next to extend it, the option for itemizers to deduct state and local sales
taxes in lieu of state and local income taxes will expire at the end of 2011.
As a result, individuals who will elect on their 2011 return to claim a state
and local general sales tax deduction instead of a state and local income tax
deduction, and are considering the purchase of a big-ticket item (e.g., a car
or boat), should consider accelerating the purchase into this year to achieve a
higher itemized deduction for sales taxes.

Pre-pay qualified higher education expenses
for first quarter of 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, individuals should consider
prepaying eligible expenses if doing so will increase their 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.

Lock in the potential to earn tax-free
gains. There is no tax on gain from the sale of qualified small
business stock (QSBS) that is: (1) purchased after September 27, 2010 and
before January 1, 2012, and (2) held for more than five years. In addition,
such sales won't cause AMT preference problems. To qualify for these breaks,
the stock must be issued by a regular (C) corporation with total gross assets
of $50 million or less, and a number of other technical requirements must be
met.

Be sure to take required minimum
distributions (RMDs). Taxpayers who have reached age 70- 1/2
should be sure to take their 2011 RMD from their IRAs or 401(k) plans (or other
employer-sponsored retired plans). Failure to take a required withdrawal can
result in a penalty of 50% of the amount of the RMD not withdrawn. Those who
turned age 70- 1/2 in 2011, can delay the first required distribution to 2012.
However, taxpayers who take the deferral route will have to take a double
distribution in 2012—the amount required for 2011 plus the amount required for
2012.

Make year-end gifts. A
person can give any other person up to $13,000 for 2011 without incurring any
gift tax. The annual exclusion amount increases to $26,000 per donee if the
donor's spouse consents to gift-splitting. Annual exclusion gifts take the
amount of the gift and future appreciation in the value of the gift out of the
donor's estate, and shift the income tax obligation on the property's earnings
to the donee who may be in a lower tax bracket (if not subject to the kiddie
tax).