By David M. Kendrick, CPA, MST 2010 is a year of monumental tax law changes. Congress cannot agree on what should happen regarding extending the Bush era tax cuts and it is widely speculated that nothing is going to change until after the November election. If the lack of congressional action on the Estate tax is any indication, taxpayers should be prepared for no consensus agreement-- which means tax rates will increase. What was the once the top brackets of 33% & 35% will increase to 36% & 39.6%! Here are some ideas to consider in your yearend planning: Accelerate income; defer deductions? With tax rates likely to increase in 2011, the typical rule of deferring income may not apply; taxpayers in the 33% or higher tax brackets who anticipate similar or higher earnings in 2011 may want to consider accelerating income into 2010 or deferring deductions until 2011. An alternate strategy for those looking to avoid the 2011 return of the itemized deduction phase out is to accelerate deductions such as mortgage payments, property taxes, and charitable contributions into 2010. Recall that for 2010 higher income taxpayers were given a one-time vacation from the itemized deductions “phase-out”, Evaluate Your Investments: The tax rate for long-term capital gains is scheduled to increase to 20% in 2011 so accelerating gains into 2010 may yield substantial savings. By contrast, capital loss carry forwards from the 2008 market debacle will increase in value by 25% since they will offset 2011 gains taxed at the new 20% rate. Keep in mind that short-term capital gains (investments held less than one year) are generally taxed at the higher ordinary rate so generally all taxpayers should off-set those gains with long-term losses when possible. Give to the Charity of Your Choice: One gifting strategy growing in popularity is to contribute appreciated stock directly to charity. For stock that has decreased in value, sell it first and then donate the cash proceeds to charity. Selling the depreciated stock first yields both a capital loss and a charitable contribution deduction. Keep in mind that a charitable contribution in excess of $5,000 will generally require a contemporaneous qualified appraisal. If you want to make a charitable donation but you are low on cash, consider charging it on your credit card. The contribution is deductible in the year charged, not when you make the payment on the card. Participate in a Retirement Plan: Saving for retirement has both long-term and short-term benefits! If you own a business consider setting up a retirement plan before yearend to maximize potential deductions. Retirement deductions may be included on your 2010 tax return while actual funding may be deferred until your return’s final filing deadline. Employees should consider contributing the maximum amount ($16,500 for 2010, plus an additional $5,500 if age 50 or over) if your employer has a 401(k) plan; limits vary by the type of retirement plan available. Most workers should consider funding a contribution of up to $5,000 to a Traditional or a Roth IRA plus an additional catch-up contribution of $1,000 for those over age 49. Selecting the best option or to consider a Roth conversion requires a comprehensive tax planning analysis. Considering borrowing from your 401(k): Before you cash out your 401(k) and get hit with taxes and penalties when you can least afford them, consider a short-term loan from your plan. See this article for more details. This newsletter cannot possibly cover all the possibilities but it should provide food for thought and prompt you to make your tax planning appointment today. Call us today and schedule your appointment.
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