Year End Tax Planning
Year End Tax Planning
As we approach the end of the 2010 tax year, there is only a limited amount of time for individuals to take advantage of certain tax savings strategies. Some last-minute tax planning before December 31, 2010 should include some or all of the following actions.
Make a charitable contribution by cash or credit card. Charitable contributions can be made at any time, in cash or in property. You want to accelerate dues and fees for church or synagogue memberships. While a pledge is not deductible, an actual payment will qualify when the payment is made, not when it is received. Thus, putting a check in the mail qualifies as a payment when the payer gives up control of the check (assuming there are sufficient funds and the check is eventually honored), not when the check is received, deposited, or honored.
- Charging a contribution is another means of accelerating payment. Payment by credit card is in effect a loan to the payer and is deductible when the charge is made. Thus, if you make the charge in 2010 but it is not honored until 2011, you can still take the charitable deduction on your 2010 return. Note: special rules may apply to contributions of property, especially motor vehicles.
Adjust withholding. State and local income taxes are deductible when withheld, paid as estimated taxes or paid with a return. If you anticipate owing taxes for 2010, make an additional payment to cover the expected liability. The payment must be made in good faith and be based on a reasonable estimate of your tax liability. Taxpayers paying estimated taxes can make the final payment before the end of 2010.
- Itemized deductions. In past years, there have been limits on itemized deductions taken by higher-income taxpayers. These limits do not apply in 2010, so taxpayers should not feel constrained to limit their payments and contributions. For higher-income taxpayers, this is especially beneficial.
- Deduction for health insurance costs. If you are self-employed, you can take a deduction for your health insurance costs when computing self-employment tax and the self-employment tax deduction.
Small business stock. If you sell qualified small business stock before January 1, 2011, and are eligible for the increased exclusion from income, you may be able to exclude 100 percent of the gains from the sale of stock. Speak with your tax professional before selling such stock, however, since the rules on eligibility and holding periods can be complex. For a majority of taxpayers, the traditional rules for accelerating/deferring income and/or maximizing or deferring deductions to lower your tax bill may still apply in 2010, despite the threat of higher income tax rates next year still possible. Depending on your situation, you may want to:
- - Accelerate income if possible, including bonuses, into 2010;
- Defer selling capital assets at a loss until 2011 and later years;
- Sell capital assets that have appreciated in 2010 to take advantage of the lower capital gains rates (the maximum capital gains rate is 15 percent for 2010);
- Move some assets into tax-free instruments, like municipal bonds, that are not subject to federal tax;
- Accelerate billings and/or provide incentives for clients or customers to make payments in 2010 (if you are a self-employed and/or cash-basis taxpayer);
- Take taxable retirement plan distributions before 2011 (for taxpayers over age 59 1/2); and
- Bunch itemized or business deductions into the 2011 tax year.
Maximize "above-the-line" deductions. Above-the-line deductions are especially valuable because they reduce your adjusted gross income (AGI). Many tax benefits may be limited for taxpayers whose AGI is too high. Common above-the-line deductions include contributions to traditional Individual Retirement Account (IRA) and Health Savings Account (HSA), moving expenses, self-employed health insurance costs, and alimony payments.
Claim "green" credits. You may be able to claim tax credits for purchasing particular property. Certain hybrid cars, such as the Nissan Altima, qualify for an energy credit under Code Sec. 30B. Consult with an auto dealer or check IRS rulings to see what credits are in effect, because the credit for a qualifying "green" vehicle phases out over time and eventually is reduced to zero.
- Another credit available for "green" taxpayers is the residential energy credit. The credit is 30 percent, up to a total of $1,500, of certain energy-efficient improvements made by a homeowner to his or her principal residence during 2009 and 2010. For example, the credit can be claimed by installing energy efficient windows and doors. See the discussion below on Energy Credits.
Make a tax-free gift. You can gift, tax-free, up to $13,000 per donee in 2010. A married couple can apply a combined exclusion of $26,000 to a gift of property for one person. Further amounts to any one taxpayer will be offset by the donor's lifetime exclusion before gift tax is owed. The exclusion applies per year. If it is not used, it is lost; it does not carry over to the succeeding year.
Use an installment sale. If you may be selling property at a gain, you can avoid recognizing the entire gain by using an installment sale. An installment sale has at least one payment after the year of sale. The payment is taxed when it is made, not at the time of the sale. Thus, income can be postponed. The installment method is not available for stocks and bonds, however.
- There can be competing considerations, however. Tax rates may increase in 2011 and future years, although perhaps only for the highest-income taxpayers. Still, the amount of gain included in a future payment could be taxed at a higher rate. The 3.8 percent Medicare tax imposed on certain income starting in 2013 also is a factor.
Take your required minimum distributions (RMDs). RMDs have returned for 2010. Although Congress temporarily suspended the RMD requirements for distributions from IRAs and other retirement accounts in 2009, it did not extend this benefit into 2010. Therefore, taxpayers who are age 70 or older must take their RMD from a traditional IRA (Roth IRAs are not subject to the RMD rules), 401(k) or other retirement accounts by December 31. Failure to do so will subject you to a stiff penalty of 50 percent of the amount you were required to withdraw but failed to. However, for taxpayers who turned age 70 in 2010, you have until April 1, 2011 to take your first RMD.
These are just a few last-minute tax planning strategies you may want to consider as year-end approaches. As always, please contact Edward Karass, EA, MBA at 207-582-5000 or visit his website at www.karassfinancial.com to take advantage of a number of free tax planning tools, organizers and calculators. Email Ed at firstname.lastname@example.org if you have any questions.
If you make energy-efficient improvements to your home in 2010, you may be eligible for a federal tax credit that can help lower your tax bill. Two of the main credits for "green" improvements made to a home are the nonbusiness energy property credit and the residential energy efficient property credit. If you qualify for a tax credit, you will need to retain documentation that your energy efficient improvements are eligible for the tax credits you claim. You will need to certify that the property you purchase to improve your home qualifies for the credit - you don't want to purchase items with the intention of claiming a credit only to find out later that the items do not qualify.
The Code Sec. 25C nonbusiness energy property credit is a nonrefundable tax credit for qualified residential energy property. The credit amount is 30 percent of the sum of expenses for qualified energy efficiency improvements and qualified energy property for 2009 and 2010 property. The credit is limited to a lifetime maximum credit of $1,500 for 2009 and 2010 property.
- The credit is available for a variety of energy property. Among the residential energy property that may qualify for the credit are:
- - Furnaces and boilers;
- Water heaters (non-solar);
- Central air conditioning;
- Exterior windows, doors and skylights; and
- Certain roofing.
- There are also a number of household items that are not covered by the tax credit, including:
- - Ceiling fans;
- Washers & dryers;
- Lighting (for example, light fixtures, compact fluorescent light bulbs, and LEDs) ;
- Ovens / Ranges; and - Programmable thermostats.
A related credit - the Code Sec. 25D residential energy efficient property credit - provides a nonrefundable tax credit for qualified residential energy efficiency property placed in service before 2017. Generally, the credit is 30 percent of the cost of qualified residential energy efficiency property with no upper limit except for qualified fuel cell property.
The residential energy efficient property credit is also available for a variety of energy property. They include solar electric property, solar water heating property, geothermal heat pumps, small wind energy systems, and fuel cell property. The credit generally encompasses labor costs applicable to on-site preparation.
Certifying your purchases
- Not all energy efficient improvements are eligible for a tax credit. For example, ENERGY STAR distinguishes energy efficient products which may be eligible for a tax credit; but, many individuals may not be aware that not all ENERGY STAR products qualify for a tax credit. Therefore, you should check the manufacturer's tax credit certification statement (discussed further below) before purchasing or installing any products in your home.
- To claim a credit for products "placed in service in 2010" (that is, installed), homeowners must complete Form 5695, Residential Energy Efficient Property Credit, and submit the form with their Form 1040 when they file their 2010 taxes by April 17, 2011 (since April 15 falls on a Friday in 2011). Homeowners do not need to provide the IRS with any other documentation when filing their return.
- However, you should keep a copy of the Manufacturer's Certification Certificate, any labels from the products you purchased showing they meet certain energy efficient standards, and your sales receipts. A Manufacturer's Certification Statement is a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit. Manufacturers generally provide these certifications on their website or with the product packaging. Homeowners can generally rely on these statements for certification. The certification does not need to be attached to your return.
This newsletter article and others are available on the Karass Financial & Accounting website at www.karassfiancial.com.
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