Tax Tip for
November 2010
Year-End Tax
Planning - 2010
The 4th quarter is
the ideal time to consider recent tax law changes and to discuss year-end tax
planning strategies. We try to provide this tax planning letter early enough for
you to take action prior to year-end. The challenge this year is that Congress
still has some very important decisions to make on many tax provisions that
expired at the end of last year, or will expire at the end of 2010.
Some of the tax provisions that expired at the end of 2009 that have yet to be
extended include the sales tax deduction, the additional standard deduction for
real estate taxes, alternative minimum tax ‘patch’, tuition deduction, tax-free
unemployment benefits, and charitable donations from IRAs.
In addition, Congress must decide whether to extend the Bush tax cuts for some
or all taxpayers. These and other Bush-era tax rules expire at the end of this
year. Without Congressional action, individuals will face higher tax rates on
their income, including long-term capital gains (“LTCG”). Also, unless Congress
changes the rules, the estate tax, which isn't in effect this year, will return
next year with a 55% top rate.
That being said, we have compiled a list of actions that can help you save tax
dollars if you act before year-end. Not all actions will apply to your
particular situation, but you will likely benefit from many of them.
• Place new business equipment, machinery and furniture in service before
year-end to take advantage of the Section 179 expensing rules. The maximum
amount you can expense for 2010 is $500,000 of the cost of qualifying property
placed in service.
• Individuals with large gains in investment assets held in nonqualified
accounts (i.e. not a retirement account or annuity) should consider selling
before the end of 2010 to lock in this year's maximum LTCG rate, which may be
lower than next year's rate. For 2010, LTCG are taxed at a maximum rate of 15%.
By contrast if the Bush tax cuts expire, LTCG will be taxed at a maximum rate of
20%. Before selling investments you should consult with your investment advisor.
• Lock in capital losses. If you are holding onto investments in nonqualified
accounts that have lost value since original purchase, consider selling before
year-end to capture the capital losses for tax purposes. You are allowed to buy
back the same securities as long as you wait at least 31 days. Before selling
investments you should consult with your investment advisor.
• Make energy saving improvements to your main home, such as putting in extra
insulation or installing energy saving windows or buying and installing an
energy efficient furnace, and qualify for a 30% tax credit. The total
(aggregate) credit for energy efficient improvements to the home in 2009 and
2010 is $1,500. Unless Congress acts, this tax break won't be around after this
year.
• Consider converting your traditional IRA into a Roth IRA. Distributions from a
Roth IRA can be tax-free, but the conversion is taxable. However, for 2010
conversions only, you can either (1) pay the tax on the conversion with your
2010 return, or (2) pay half the tax on the conversion with your 2011 return and
the other half with your 2012 return.
• Take required minimum distributions (“RMD”) from your IRA (or 401(k), etc.) if
you have reached age 70 1/2. Failure to take a required withdrawal can result in
a penalty of 50% of the amount not withdrawn. A temporary tax law change waived
the RMD requirement for 2009 only, but the usual withdrawal rules apply in full
force for 2010.
• For college costs, the American Opportunity Credit is set to expire at the end
of 2010. This provides a credit of up to $2,500 per student. For the full
credit, you’ll need to spend at least $4,000 on qualified expenses, and have
adjusted gross income of less than $80,000 ($160,000 if married filing jointly
(“MFJ”)). If you haven’t already met the $4,000 limit, consider prepaying
tuition or buying textbooks for spring classes before the end of the 2010.
• Arizona School Tax Credits. Qualifying contributions made before December 31,
2010 will generate a dollar-for-dollar state tax credit as well as a federal
itemized deduction for charitable contributions. Maximum donations to a
qualifying private school are $500 ($1,000 if MFJ). Maximum donations to a
qualifying public school are $200 ($400 if MFJ). You can take advantage of both
of these school tax credits in the same year.
New Arizona Rule for the Private School Credit:
A contribution made by April 15th may be treated for purposes of this tax credit
as if it was made on December 31st of the prior year. Thus, a contribution made
to a qualifying private school between January 1, 2011 and April 15, 2011 could
be used as a tax credit on either your 2010 or 2011 Arizona income tax return.
• Arizona Charitable Tax Credit. Similar to the School Tax Credits, qualifying
contributions made before year-end can generate a state tax credit and a federal
itemized deduction for charitable contributions. The total available credit is
$200 ($400 if MFJ). Contributions made to charities that assist the Working Poor
qualify. A list of these charities appears on the ADOR website
http://www.azdor.gov under
individuals/tax credits/charitable tax credits.
• Arizona Tax Credit for Donations to the Military Family Relief Fund (“MFRF”).
Also similar to the School Tax Credits, qualifying contributions made before
year-end can generate a state tax credit and a federal itemized deduction for
charitable contributions. The total available credit is $200 ($400 if MFJ). To
qualify, contributions must be made to the MFRF, and you must receive a receipt
from the AZ Dept of Veteran’s Services (which administers the MFRF) stating that
the donation qualifies for the credit. Unlike the school & charitable tax
credits, unused credits cannot be carried forward.
Please feel free to contact us to discuss your specific tax situation. By doing
year-end tax planning now, we can take a proactive approach to reducing your
taxes, rather than just being reactive.
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