Year-end tax planning is a necessity this year. Although current tax rates are scheduled to remain in effect through 2012, the unexpected may happen as Congress and the White House tackle to shrink the federal budget deficit.

Maximize your 401(k) contributions

Money you contribute to your 401(k) or similar employer-based retirement plan is excluded from your income (if it’s not a Roth), lowering your tax bill. If you’re not yet on track to max out your contributions by year-end, you can direct some extra dollars to your retirement plan during your last few pay periods. In 2011, workers can contribute up to $16,500 to employer-based plans. Workers 50 and older can contribute up to $22,000.

Although only a small percentage of workers contribute the maximum amount to their retirement plans, you may want to take full advantage of this tax-saving opportunity and step up your contributions in 2012. One tax-reform proposal would scale back maximum 401(k) contributions to 20 percent of income or $20,000 per year, whichever is less.

Review your investments

Investments held for more than one year and sold at a profit qualify for the 15 percent long-term capital gains rate, as do qualified dividends. But this year and next, taxpayers in the two lowest income-tax brackets ($34,500 for individuals or $69,000 for married couples) can take advantage of a 0 percent capital gains rate and sell assets at a profit tax-free.  This favorable tax treatment is set to go away after 2012.

You may want to consider repurchasing a stock or fund. Although the “wash sale rule” discourages you from buying a substantially identical stock or fund that you sold at a loss within 30 days either before or after the sale, there are no time restrictions for buying a security that you sell at a profit. Repurchasing a stock or fund at its current price will establish a new, higher cost basis, which will result in a smaller taxable gain or a larger tax-deductible loss when you sell it.

Improve your home

This is your last chance to claim a tax credit for making energy-efficient improvements to your principal residence. The home-energy tax credit expires at the end of this year. It is worth 10 percent of the cost of new windows, doors, skylights, insulation, and heating and air conditioning systems, up to a maximum $500 credit (but no more than $200 can be allocated to new windows). You must install the upgrades by December 31 in order to claim the credit, but you can’t claim it for 2011 if you already took advantage of $500 or more of energy tax credits in previous years.

An even bigger credit is available to homeowners who install renewable-energy equipment, such as geothermal heat pumps, solar panels and small wind turbines, in their primary residence or vacation home by the end of the year. You can claim a credit for 30 percent of the cost, including installation, with no limit. This credit will not expire until 2017.

Maximize your itemized deductions

Taxpayers who itemize deductions can choose between writing off their state income taxes or their sales taxes in 2011. In most cases, income taxes will provide the bigger tax break. But if you live in a state with no income tax, such as Florida, or you buy a big-ticket item such as a car or boat by December 31, you may be better off deducting sales taxes.

Take advantage of writing off the full value of your mortgage interest and other itemized deductions while it last. There is a consideration in Washington about restricting itemized deductions for high earners as part of a tax reform plan to simplify the system and raise revenue.

You also may think about accelerating some deductible expenses, such as paying your January mortgage, your 2012 real estate taxes or fourth-quarter estimated state income taxes in December so you can add them to your itemized deductions for 2011. Be aware that those who are subject to the alternative minimum tax will need a different year-end strategy.

Give to charity

It’s time for a fall clean up! Clean out your closets and garage and you can add hundreds of dollars to your itemized tax deductions. Please be aware that valuing such donations can be difficult and you will have to find estimated values for your donated clothing and household goods. If you donate over $500 in non-cash items, you will need to itemize those items on a separate form on your tax return.

If you donate your used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle’s fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle’s sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return.

If you contribute $250 or more in cash donations, you will also need an acknowledgment from the charity.

If you plan to make a significant gift to charity this year, consider giving appreciated stocks or mutual fund shares that you’ve owned for more than one year. Your charitable-contribution deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. Talk to your CPA about ways to reduce your taxes using one of the three basic methods - reduce your income, increase your deductions, and take advantage of tax credits. And remember - your tax planning costs are deductible while your income taxes are not!

Dalia Cantor is the owner and founder of Avalon Park Accounting located in East Orlando.  Her visionary approach to accounting has made her firm the logical choice for several medical practices that have become more successful once they were able to maintain their customer focus and outsource the accounting and tax services to her firm.  Her business knows no boundaries as her clients are throughout the United States and Europe. dcantor@avalonparkaccountig.com

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