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BlackStar Investments

Tax and Financial Services

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How to Dodge Last-Minute Tax Traps

Posted on December 25, 2011 at 3:37 PM
The holidays are here and everything important is done, right?
Well, maybe not everything. Some will find themselves racing next week to meet year-end tax deadlines to make charitable gifts, plan taxes on investments and make annual gifts to others.
If you are one of them, don't overlook important details. The Internal Revenue Service certainly won't. And remember the underlying principle behind whether a tax move counts for 2011: It can't be undone.
Here, then, are some last-minute tips.
Charitable donations. Gifts of cash via check must be mailed to qualified nonprofits by year-end, although the checks needn't be cashed this year. What matters is the 2011 postmark.
A spokesman for the U.S. Postal Service says post offices will be open on New Year's Eve, although many will close at noon; check local schedules.
If you really want to ensure a donation counts for 2011, use certified U.S. mail and request a return receipt, says charitable-giving expert Conrad Teitell, an attorney at Cummings & Lockwood in Stamford, Conn. A postage-meter mark isn't proof, and if you use a private courier such as FedEx, the charity must receive the gift in 2011 for you to take a deduction for this year.
This standard is different from the one for mailing tax returns, which puts several private couriers, including FedEx, on a par with the U.S. Postal Service, Mr. Teitell says.
If you charge a donation on a credit or debit card, the charge must be posted in 2011, although you don't have to have paid the bill this year.
Charitable gifts of appreciated securities, often a tax-wise move, can be tricky. For those held over a year, the deduction is the average of the high and low price on the date it is electronically transferred to the charity—or, in those rare cases where the security is mailed, the date of mailing.
Charitable-donation specialist Laura Peebles of Deloitte Tax in Washington recommends checking with your broker to find out the lag time between your instruction and the transfer, especially if the gift is large or the price is volatile.
Taxpayers up against a deadline may want to give securities to a donor-advised fund, which many brokerages offer. These are charitable funds that serve as holding pens for future gifts. Donors can make a gift before year-end, take a 2011 deduction and choose recipients later. Payouts from the fund aren't deductible, but the donation may grow tax-free until then.
Individual retirement accounts owners at least 70½ years old may donate up to $100,000 of account assets to qualified charities in 2011. Such gifts aren't deductible, but neither do they raise income in a way that might trigger income tax on Social Security payments or raise Medicare premiums. The gifts also count as part of the owner's required payout if he or she hasn't already taken one.
IRA proceeds must be transferred directly to the charity by the account administrator, and the charity should receive it in 2011. Use extreme caution here, Mr. Teitell says: A misstep could cause the donor to miss out on this year's benefit, and the provision expires Dec. 31.
Then there are gifts of personal property, such as clothing or furniture to a thrift shop. In general, the items must be in good used condition to be deductible.
Single items not in good condition worth $500 or more may be deductible with an appraisal. An appraisal is also needed for an item or group of items totaling $5,000 or more, regardless of condition, even if the items go to different charities. Gifts of artwork and non-traded securities are subject to different rules that may require expert help. For more information, see IRS Publications 526 and 561.
Investments. If you are making year-end trades, such as for tax-loss harvesting, note that the IRS looks to the trade date, not the settlement date, to determine when a transaction occurred.
With Congress in deadlock, some investors may want to start the clock ticking for long-term capital gains next year. In 2013 the current 15% top rate on long-term gains—a historic low—is scheduled to rise to 20%, and a new 3.8% tax on investment income takes effect for most joint filers with adjusted gross income above $250,000 ($200,000 single).
The upshot: Investors hoping to realize long-term gains by the end of 2012 should own the asset by Dec. 30 of this year, says Andy Mattson, a CPA with Mohler, Nixon & Williams in Campbell, Calif. Long-term gains and losses are those held longer than a year.
"Given current market values and higher taxes on the way, investors with stock options may also want to consider an exercise," he says.
Noncharitable gifts. Details also matter for taxpayers hurrying to make annual exclusion gifts—those up to $13,000 a year that a person may make to an unlimited number of recipients.
Be careful with checks. Either the recipient should deposit the check in 2011 or it should be certified. Gifts of securities are final once they are transferred electronically. Paper transfers of assets may require expert help.
The same holds true if Grandma wants to give her granddaughter heirlooms before year-end. The recipient must take possession of the items. "It helps to have Grandma write a letter describing the gift," Mr. Teitell says.

Categories: Tax Topics

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