The midterm elections have changed the Congressional scene, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it’s still too early to know exactly how this will affect open tax issues for 2010 and 2011. It seems at this point that the Bush Tax cuts are going to be extended, although the details have not yet been hammered out in Congress. In addition, Congress must decide whether to “patch” the alternative minimum tax (AMT) for 2010, as it has done in past years. It also must decide whether to retroactively extend the research credit for businesses, the child tax credit of $1,000 per child, the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes, and the additional standard deduction for State and local real property taxes.
In short, year-end planning—which always involves some educated guesswork—is a bigger challenge this year than in past years. That said, we have compiled a checklist of items to keep an eye on.
•Deferring Income- The practice of deferring income to the following year may or may not be a wise decision, depending on what bracket you fall in. It seems likely that the Bush Tax cuts are going to be extended for a period of time. Once the new tax law has been passed, you may want to call in to discuss its effect on your taxes.
•Accelerating Itemized deductions- For the past several years, high income individuals have seen their ability to take itemized deductions increase because the limitation on itemized deductions was temporarily phased-out of the tax code. However, unless modified, in 2011 the limitation returns. It may be wise for high income individuals to increase the itemized deductions now, even though rates may increase in 2011.
•Selling your capital assets- Another item to look for is the effect year-end tax legislation will have on long-term capital gain rates
• Health Savings Accounts- Increase the amount you set aside for your health savings account (HSA). The limits for this year are $6,150 (for families) or $3,050 (for individuals). In most cases you can make contributions until April 15, 2011.
•Employer Stock Options- If your company has granted you an incentive stock option (“ISO”) or nonqualified stock option (“NSO”), now may be the time to exercise.
• Conversion of Traditional IRA to a Roth IRA- Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion may increase your adjusted gross income for 2010. During 2010, you have the choice of when to pay the tax on the conversion. You can either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.
• Qualified Small Business Stock- Purchase qualified small business stock (QSBS) before the end of this year. At this time, there is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems.
• Required Minimum Distribution- Take required minimum distributions (RMD) from your IRA or 401(k) plan (or other employer-sponsored retired plan) 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.
These are just some of the year-end steps that may help to save taxes, depending on last-minute decisions by Congress.
Call us to discuss your situation today!