Year-end planning techniques can maximize tax savings
As the end of 2010
approaches, it is a good time to start year-end tax planning. Between now and
December 31, 2010, there is time to put in place some tax saving strategies.
Many of these strategies are familiar ones; others are tailored to these
challenging economic times.
One of the tried and
tested year-end planning methods is income and expense shifting. Basically,
you aim to smooth out taxable income between 2009 and 2010 by accelerating
and postponing transactions that either produce income or yield deductible
expenses. This technique works best if you can reasonably forecast your
income and expense situation in the first few months of 2010.
One complicating factor
this year is the recession. For many individuals, the end of 2009 is very
different from the beginning of the year. Salaried workers and their spouses
may have experienced a lay-off, furlough or reduction in hours at work.
Self-employed individuals may be struggling with cash-flow problems. Many
retired individuals are also having a hard time coping during the recession.
Investment income is down and some retirees have re-entered the job market.
Fortunately, there are
some provisions in the Tax Code that can help. For example, job hunting
expenses may be deductible. The first $2,400 in unemployment benefits is
tax-free. If you relocate to take a new job, moving expenses may also be
Besides employment, other
life events have tax consequences. Marriage, divorce and children all impact
your federal tax status. Some of the most overlooked tax incentives are
targeted to children. If you paid someone to care for a child, spouse, or
dependent, you may be able to reduce your tax by claiming the child and
dependent care credit on your federal income tax return. This credit is
separate from the child tax credit, which is $1,000 per qualifying child for
2009. There is also an adoption tax credit. Many parents are using
Coverdell Education Savings Accounts to put aside funds for a child's
schooling. Although the contributions are not tax-free, the distributions, if
used for qualified education expenses, are tax-free. There is also an
expanded education tax credit, the American Opportunity Tax Credit, which can
help with college tuition costs.
For 2009, state and local
sales taxes are also deductible (in lieu of state and local income taxes).
This benefit may be especially valuable if you are planning a big-ticket
purchase in the near future. Another popular tax incentive will expire before
the end of 2009: the first-time homebuyer credit is set to expire after
November 30, 2009. Several bills have been introduced in Congress to extend
the credit another year. Our office will keep you posted on developments.
Wage-earners and pension
recipients also need to plan for the Making Work Pay Credit. This payroll
credit was enacted in early 2009. Employers and some pension plans are
withholding less federal income tax. The impact of the Making Work Pay Credit
varies significantly, depending on a taxpayer's earned income, filing status
and number of withholding allowances. The credit phases out for a single
taxpayer who has modified adjusted gross income (AGI) between $75,000 and
$95,000, and for married couples filing jointly whose modified AGI is between
$150,000 and $190,000. Individuals with more than one job and married couples
with two incomes may be surprised when they file their taxes in 2010 to
discover that they are receiving a smaller refund or owe money. If you
have not yet adjusted your withholding for 2009, now is the time to act.
A lot of folks are
talking about IRA conversions. Starting in 2010, anyone can convert a
traditional IRA to a Roth IRA regardless of their income and other current
restrictions. You can choose to recognize income from the conversion in 2010
or average it out over 2011 and 2012. President Obama has proposed raising
the top two individual marginal income tax rates after 2010. If you are
considering an IRA conversion, you may want to do it next year and recognize
the income in 2010. However, be cautious. The new IRA conversion rules are
generous but not for everyone. Our office can help evaluate if an IRA
conversion fits your savings strategy.
Small business expensing
under Code Sec. 179 is at an all-time high this year ($250,000). The
threshold for reducing the deduction is $800,000. The higher amounts are set
to expire after 2009. Businesses that have been contemplating a purchase need
to act soon if they want to take advantage of the more generous Code Sec. 179
expensing amount. The expensing amount will fall to $134,000 in 2010 unless
Congress extends it.
Another business tax
break - bonus depreciation - will also expire at the end of 2009. Fifty
percent bonus depreciation is taken on top of the regular depreciation for
the year the property is placed in service. Keep in mind that a larger
current depreciation deduction results in smaller future deductions.
Many small business
owners operate their businesses as sole proprietorships or partnerships. The
expected increase in the top two marginal income tax rates after 2010 will
also affect them. It is not too early to start planning for those anticipated
Small businesses should
have a year-end retirement plan check-up. The Obama administration and the
IRS recently announced some measures to encourage small businesses to offer a
retirement plan or expand an existing plan. Our office can help you choose a
retirement plan that is right for your small business.
Because of the recession,
many individuals cannot meet their tax debts. The IRS is aware of how
families are struggling and has promised to help. You may qualify for an
installment agreement, which allows you to pay your taxes over time. The IRS
might also accept an offer-in-compromise. Some individuals are uncomfortable
by how the recession has impacted them. Don't be. If you have unresolved
debts with the IRS, let our office know now. We can work with the IRS on your
The same is true for
small business owners. Frankly, the IRS is less sympathetic to business
owners that fall behind in their tax obligations, especially payroll taxes,
than with individuals. It may be tempting to skip a payroll tax deposit. This
is a dangerous tactic and will result in severe penalties. Again, our office
can help you work with the IRS.
Harvesting Capital Losses
It is always a good idea to take capital losses for tax purposes. You can deduct up to $3,000 a year against other income if your capital losses exceed your capital gains. You do have to be careful of what is called a 'wash sale'. This is when you sell a stock and rebuy it within 30 days. If you do that your loss is deferred.
However, this is often easy to work around. For example, you own say Exxon stock and have a loss. You sell it and buy Chevron and you are fine.
You sell a mutual fund and buy a similar ETF, again, no problem.
always, please contact our office if you have any questions about year-end
tax planning. The earlier you get started, the better you can maximize your
potential tax savings.
We have no problem helping non clients too.