29-Nov-2010

By Charles E. Davis, Attorney

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. Specifically, Congress must decide whether to extend the Bush tax cuts before they expire at the end of this year. 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 actions that can help you save tax dollars if you act before year-end. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which moves to make.

•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.  Currently, the Bush Tax cuts are set to expire at the end of this year. Rates across the board are set to increase.  Here is a listing of the some rate increases which will occur if Congress does nothing.

 

2010 Ordinary Income Brackets

Single Filer

Joint Filer

2010 rates

2011 rates

$0 – $8,375

$0 – $16,750

10%

15

$8,375 – $34,000

$16,750 – $68,000

15

15

$34,000 – $82,400

$68,000 – $137,300

25

28

$82,400 – $171,850

$137,300 – $209,250

28

31

$171,850 – $373,650

$209,250 – $373,650

33

36

Over $373,650

Over $373,650

35

39.6

 

Prior to the election, it was widely believed that Congress would enact a bill which increased rates in the top two brackets and keep rates in the rest of the brackets unchanged from the 2010 rates.  However, rumors abound that President Obama is willing to entertain another short term extension of the lower rates for taxpayers in the top two brackets.  Only time will tell.  At a minimum, everyone should be skeptical about the traditional notion that deferring income will result in a more favorable tax consequence.

 

•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, in 2011, the limitation returns.  It may be wise for high income individual’s 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.  Here is a sample listing of the some of the rate increases which will occur if Congress does nothing.

Long-Term Capital Gains

2010 Ordinary Income Brackets

2010 Long-Term Capital Gains Rates

2010 Long-Term Capital Gains Rates

10%

   0%

   10%

15

0

10

25

15

20

28

15

20

33

15

20

35

15

20

Thus, if your net taxable income, including capital gain, is less than $68,000 (for taxpayers filing a joint return) or $34,000 (for taxpayers filing a single-return), you may be able to sell your capital assets tax free.  Even if your net taxable income exceeds those amounts, a potential to save 5% still exists.  The rate increase is especially important for 1) persons who have large unrealized gains in stock or 2) persons who plan on selling a large asset or business with unrealized gains. 

• Health Savings Accounts- Increase the amount you set aside for your health savings account (HSA). The limits for this year are than $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. 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 can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.