2010 Year-End Tax Planning Tips
For 20
10, year-end tax planning is particularly challenging. That's because a great deal of uncertainty remains for both 2010 and 2011. Despite this, the window of opportunity for many tax-saving moves closes on December 31. So set aside time to evaluate your tax situation now, while there's still time to affect your bottom line for the 2010 tax year, and stay up-to-date on any late-breaking legislative changes.
Timing is everything
Year-end tax planning is as much about the 2011 tax year as it is about the 2010 tax year. There's an opportunity for tax savings when you can predict that you'll be paying taxes at a lower rate in one year than in the other. If that's the case, some simple year-end moves can pay off in a big way.
If you think your income tax rate will be lower next year, look for opportunities to defer income to 2011. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Similarly, you may be able to accelerate deductions into 2010 by paying some deductible expenses such as medical expenses, charitable contributions and state and local taxes before year-end. If you think you'll be paying tax at a higher rate next year, consider taking the opposite tack--possibly accelerating income into 2010 and postponing deductible expenses until 2011.
Tax rates scheduled to increase
For 2010, there are six federal income tax brackets: 10%, 15%, 25%, 28%, 33% and 35%. Absent new legislation, there will be no 10% tax bracket in 2011, and the remaining bracket rates will return to their pre-2001 levels: 15%, 28%, 31%, 33.6% and 39.6%.
Also, in 2011, the maximum tax rate that generally applies to long-term capital gains and qualifying dividends will increase from the current rate of 15% to 20% for long-term capital gains and to ordinary income rates for dividends.
AMT uncertainty complicates planning
If you're subject to the alternative minimum tax (AMT), traditional year-end maneuvers, like deferring income and accelerating deductions, can actually hurt you. The AMT--essentially a separate federal income tax system with its own rates and rules--effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end moves. For example, if you're subject to the AMT in 2010, prepaying 2011 state and local taxes won't help your 2010 tax situation.
Since 2001, a series of temporary AMT "fixes" bumped up AMT exemption amounts, forestalling a dramatic increase in the number of individuals ensnared by the tax. But the last such fix expired at the end of 2009. While it's likely that additional legislation will extend the fix to 2010 (and possibly 2011 as well), right now AMT exemption amounts for 2010 are at pre-2001 levels. Bottom line? If you think you might be subject to AMT in either 2010 or 2011, talk to us and pay close attention to what Congress does between now and the end of the year.
|
AMT exemption amounts |
2009 |
2010 and 2011 |
|
Married filing jointly |
$70,950 |
$45,000 |
|
Single or head of household |
$46,700 |
$33,750 |
|
Married filing separately |
$35,475 |
$22,500 |
IRA and retirement plan contributions
Traditional IRAs, if you qualify to make deductible contributions, and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2010 income. Contributions you make to a Roth IRA, if you meet the income requirements, or a Roth 401(k) aren't deductible, so there's no tax benefit for 2010. However, qualified Roth distributions are completely free from federal income tax, which makes these retirement savings vehicles very appealing to many.
For 2010, the maximum amount that you can contribute to a 401(k) plan is $16,500, and you can contribute up to $5,000 to an IRA. If you're age 50 or older, you can contribute up to $22,000 to a 401(k) and up to $6,000 to an IRA. The window to make 2010 contributions to your 401(k) closes at the end of the year, but you can generally make 2010 contributions to your IRA until April 15, 2011.
Still time for 2010 Roth conversions
T
here's still time to take advantage of the special rule that applies to Roth conversions in 2010. Half the income that results from the conversion can be reported on your 2011 federal income tax return and half on your 2012 return. You may instead report all of the resulting income on your 2010 return, if you choose. Whether a Roth conversion makes sense for you depends on a number of factors, including your marginal tax rate for 2010, 2011, and 2012. However, the ability to postpone tax on the resulting income to 2011 and 2012, combined with the flexibility of being able to wait until you file your 2010 federal income tax return to decide whether you want to do so, makes a Roth conversion a strategy worth considering before year-end.
Depreciation and expensing
In lieu of depreciation, IRC Section 179 deduction rules allow for the deduction, or "expensing," of the cost of qualifying property placed in service during the year. The maximum amount that can be expensed in 2010 and 2011 under Section 179 has been increased to $500,000 (double the maximum that applied in 2009). The $500,000 limit is reduced when the total cost of qualifying property placed in service during the year exceeds $2 million.
Virginia Neighborhood Assistance Credit for Certain Charitable Contributions
Each year, Virginia designates certain charities to which donations qualify for a state tax credit of up to 40% of the contribution. Business contributions may be in the form of cash, goods, stock, real estate, professional services, contracting services and rent or lease of the participating nonprofit's facilities and must be at least $1000 in value. Individual contributions are limited to cash or marketable securities and must be at least $500 in value. A Tax Credit Certificate must be obtained from the organization. The list of approved organizations for the fiscal year July 1, 2010 to June 30, 2011 is available at http://www.dss.virginia.gov/community/nap.
Also worth noting
- For 2010, itemized deductions and personal and dependency exemptions are not reduced for higher-income individuals, but (at least for now) that's going to change in 2011: these deductions will once again be subject to a phaseout based on adjusted gross income. This should be taken into account if you're considering timing income and deductions as part of your year-end planning.
- A 30% tax credit for energy-efficient improvements you make to your principal residence, or the cost of certain energy-efficient equipment you install (including furnaces, water heaters, and central air conditioning units) expires at the end of 2010. There's an aggregate credit cap of $1,500 for 2009 and 2010, so if you claimed the full $1,500 in 2009, you're out of luck for 2010. But if you haven't reached the maximum credit amount yet, note that the qualifying expenditures must be installed and either paid for or charged prior to year end.
- When you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. RMD requirements, however, were suspended for 2009, so you may not have taken a withdrawal last year. RMD requirements are back for 2010, though, and the penalty is steep (50%) for failing to take an RMD by the date required--the end of the year for most individuals.
Talk to a professional
When it comes to year-end planning, there's always a lot to think about. And this year is more complicated than usual. We can help you evaluate your situation, keep you apprised of any last-minute legislative changes, and determine if any year-end moves make sense for you.
We hope you find the information presented below to be of value for your business and personal tax planning. If you wish to opt out of any future newsletters, click on the link at the bottom of this page. Please contact us if you would like additional information. 
