2010 Year-End Tax Planning

Summer, 2010

Tax planning is an ongoing process and should not be put off to the end of the year. Business, financial, and personal decisions made during the year can have an effect on your taxes and should be reviewed. Now is the time to consider strategies that can help you reduce your 2010 tax bill and plan ahead for 2011.

There are several strategies used to reduce taxes and most have the same starting point, AGI.  Adjusted Gross Income is the key element in determining your taxes because so many tax benefits are tied to or limited by your AGI.  So, what is your AGI…income from all sources minus adjustments.

Now, that we have established the starting point let us turn our focus on ways to reduce your taxes.  There are three basic ways to reduce taxes, reduce income, increase deductions, or take advantage of tax credits. Based on your specific tax situation, there are different strategies used to implement tax savings depending on whether your tax rate will rise or fall from the preceding year and whether you think your deductions will be restricted or increased.

If you expect your AGI to be higher in 2010 than in 2011, or if you anticipate being in the same or higher tax bracket in 2010, you may benefit by deferring income into 2011.  Some ways to delay or defer income to the following year are to defer compensation, defer year-end bonuses, defer the sale of short-term capital gain property, postpone distributions from retirement accounts, or for the self-employed, delay year-end billing to customers so that payments are not received until 2011.

In reverse, if you expect your AGI to be lower in 2010 than in 2011, or if you anticipate being in a much higher tax bracket in 2011, or maybe you will need additional income to take advantage of an offsetting deduction or credit that will not be available to you in future years, you may benefit by accelerating income into 2010.  One way to accomplish this may be to request your year-end bonus that would normally be paid in 2011 to be paid in 2010.  If you are over age 59 ½ and you participate in an employer retirement plan or have an IRA, you may want to consider making taxable withdrawals before 2011.  You could also consider making a Roth IRA rollover distribution.  If self-employed, you may want to accelerate collection of your accounts receivable.

Deductions are another complex element of year-end tax planning.  Not only are there AGI and filing status considerations, but there are also strategies for standard deduction planning as well as itemized deduction planning. 

For 2010, the overall limitation on itemized deductions is terminated.  In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses.

For standard deduction planning, it is important to know whether you would obtain little or no benefit from itemizing verses taking the standard deduction.  In making this determination, it is imperative to look at both the state tax consequences as well as federal tax consequences.  For 2010, the standard deduction is $11,400 for married taxpayers filing jointly, $5,700 for single taxpayers, $8,400 for heads of households, and $5,700 for married filing separately.  If your itemized deductions are close to the standard deduction each year, accelerating and deferring deductions to adjust the deductible expenses so they are higher in one year and lower in the following year will maximize the benefits of both the standard and itemized deductions.

For itemized deductions planning, the key is to know what expenses are eligible and when they are eligible to be claimed.  Itemized deductions include expenses for health care, state and local taxes, personal property taxes, mortgage interest, gifts to charity, job related expenses, tax preparation fees, and investment-related expenses.  As a cash-method taxpayer, an expense is deductible in the year in which it is paid. A promise to pay does not provide you the deduction, but if paid by a third party, such as a credit card company, the deduction is allowed.  Therefore, purchases made by credit card in 2010, but not paid until 2011, are eligible in 2010.

After determining AGI, reducing AGI by adjustments and deductions, we come to the credits, which directly reduce taxes.  There are many credits available to tax payers in 2010, but as with many of the tax reduction strategies, many of these credits are affected by AGI.

The Hope Credit is now called the American Opportunity Tax Credit.  This credit is now available for the first four years, rather than two years, of the student’s post-secondary education.  The maximum credit for 2009 is $2,500 (100% of the first $2,000 and 25% of the next $2,000) for qualified tuition and fees paid on behalf of the student who is enrolled at least half time.  The credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers.

Another credit, the First-time Homebuyer Credit, was set to end in November of 2009.  However, recent legislation has extended and expanded this credit.  Under the new law, it extends the deadline for purchasing to April 30, 2010 and closing on a home to June 30, 2010, authorizes a credit of up to $6,500 for long-time homeowners buying a replacement principal residence, and raises the income limitations for homeowners claiming the credit.  The new phase out limits increased by $50,000 for single filers and increased by $75,000 for joint filers.

Thought you lost out on those energy credits when they expired in 2007?  Go ahead and make that energy conscious purchase because the “Bailout Bill” brought it back and the “Stimulus Bill” extended it to 2010.  To be eligible, you must have a Manufacturer Certification Certificate, placed in service from January 1, 2009 to December 31, 2010, and must be for the taxpayer's principal residence, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems (where second homes qualify).  A credit of 30% of the cost up to $1,500 is the maximum total amount that can be claimed for all products placed in service in 2009 & 2010 for most home improvements, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems which are not subject to this cap, and are in effect through 2016.  See our homepage at www.grstarbuck.com for a link to give you more details about this credit.

For more information on this or any other tax planning strategy, please contact our office.