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YEar-End pLanning Can LowEr
fUtUrE tax biLLs? By Beth Jones, RLP®
As the 2010 year end approaches, we may be too preoccupied with
holiday plans to think about our taxes. The Bush tax cuts are set to
expire at the end of 2010, so 2011 taxes could rise to as high as 39.5
percent on income and dividends and 20 percent on capital gains.
op p o rt u n i t i e S f o r minimizing t a x l i a b i l i t i e S
First, you’ll need your prior year’s tax return, as well as your current
paystubs and account statements. Based on this information, you can
make some rough projections regarding your tax bill. If you’re in
a position similar to last year, you can expect a similar outcome; if
your situation has changed dramatically, you may need to revise your
potential tax liabilities up or down.
Consider the following:
are you withholding the right amount?
•If you anticipate owing taxes, increase your federal income tax
withholding to avoid owing a potential penalty.
•If you anticipate a large refund, decrease your withholding so
you can receive your money now rather than waiting for a refund
check.
subject to the alternative minimum tax (aMt)? The AMT
attempts to ensure that high-income individuals pay a minimum tax
amount. Following are possible triggers for the AMT:
•Large numbers of personal exemptions
•Itemized deductions for medical expenses
•Deductions for state, local, personal property, and real estate
taxes
•Home equity loan interest where the financing isn’t used to buy,
build, or improve your home
•Exercising incentive stock options
•Large miscellaneous itemized deduction amounts from items
such as investment expenses and unreimbursed employee business
expenses
Calculate your regular income tax on Form 1040; then consider your
potential AMT liability using Form 6251. If you are subject to AMT,
you should consult a tax professional.
should you change the timing of your income and deductions?
Federal income tax rates are scheduled to increase in 2011, unless
Congress acts before the end of the year. With the uncertainty around
income tax rates for 2011, you may benefit from some last-minute
moves to either accelerate or delay your income and/or deductions.
If you expect to be in a higher tax bracket next year, you might want
to accelerate income into this year so you will pay tax on it this year.
If you are in the higher marginal tax brackets, you also may want to
accelerate deductions in order to pay less tax this year. In 2010, there
is no reduction for itemized deductions for higher-income taxpayers,
but the phase-out of deductions returns in 2011.
to a c c e l e r at e i n c o m e i n t o t h i s y e a r:
•Consider selling capital gain property you anticipate
selling in 2011.
•Convert a traditional IRA to a Roth IRA.
to a c c e l e r at e d e d u c t i o n s i n t o t h i s y e a r:
•Consider paying medical expenses in December rather than
January, if doing so will allow you to qualify for the medical
expense deduction.
•Prepay deductible interest.
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•Pay real estate, state, and local taxes before year-end.
•Take deductions and credits that are only available for 2010, such
as the energy efficient home improvement credit.
Consider non-charitable gifts in 2010 and 2011, you can give up to
$13,000 ($26,000 for married couples) to as many individuals as you
choose, without incurring any federal gift taxes. Transferring assets
during life can save on future estate and gift tax bills.
Maximize contributions to retirement saving. Depending on
your personal financial situation, you may be eligible to make taxdeductible
contributions to an IRA, or you can contribute after-tax
dollars to a Roth IRA (qualified distributions will be tax-free). If
you are contributing to an employer plan, you may want to make the
maximum pretax contribution.
Update your estate plan. Review and update your estate plan to
account for any changes in your financial life, circumstances, or tax
laws to ensure that your asset titling and beneficiary choices are still
in line with your plans.
Sp e c i a l c o n S i d e r at i o n S f o r b u S i n e S S o w n e r S
Business owners have other tax considerations. Consult a professional
for assistance with your situation.
Expensing of business property. For 2010, small businesses are
allowed up to 50 percent additional depreciation for qualifying
property purchased and placed into service before December 31.
Corporate employee-shareholders. If you are an owner of a
corporation who also works in the business, you need to consider
employment taxes in your salary structure. Medicare tax, in
particular, is not capped and will be levied against all income received
as salary. Look at your salary level and company income distribution
for opportunities to reduce your taxes. The IRS expects you to take a
reasonable salary, so you’ll want to consult a tax professional.
Leverage your gift tax exclusion with your business. You may be
able to gift ownership interests that are eligible for valuation discounts.
Structures such as family limited partnerships (FLPs) and LLCs can
also provide valuation discounts when interests are transferred. These
discounted gifts can help transfer assets to save future estate or gift
taxes and can be made a regular part of the year-end tax review
routine.
Stay tuned to breaking news coming from Congress at the end of this
year, which may give you a last-minute opportunity to reduce taxes.
With a bit of effort and some professional assistance, you can pave the
way for happier tax years to come.
This material has been provided for general informational purposes only and does
not constitute either tax or legal advice. Investors should consult your tax or legal
professionals regarding your individual situation.
Beth Jones, RLP® is a Registered Life Planner and independent Financial
Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser
located at 38 Spring Lake Road in Red Hook, NY. She can be reached at
845-752-2216 or www.thirdeyeassociates.com . Securities offered through
Commonwealth Financial Network, Member FINRA/SPIC.