The Clock Is Ticking: Ten Last-minute Tax Moves

Quick ways to reduce your 2010 tax liability

Although there are precious few days left in the year, it is still not too late to cut your 2010 tax bill. But you may have to move fast. Here are ten prime tax-saving ideas to consider.

1. Capital gains and losses: If you are showing a net capital gain for the year, you may realize losses from security sales to offset the gain, plus up to $3,000 of ordinary income. Conversely, if you are showing a net loss, any gains are tax-free up to the amount of the loss. Reminder: The maximum tax rate on net long-term capital gain in 2010 is 15%.

2. Charitable donations: If you give to charity via credit card, the gift is deductible in 2010 as long as it is posted by the credit card company before the end of the year. It does not matter if you actually pay off the charge in 2011. Make sure that all charitable donations are properly substantiated.

3. State and local taxes: If you prepay next year's state and local taxes, you can increase your current deduction. However, do not prepay if you expect to owe the alternative minimum tax (AMT) this year, because these taxes are not deductible for AMT purposes.

4. Dependency exemptions: If your child is younger than 19, or a full-time student younger than 24, you can generally claim a $3,650 dependency exemption for the child if you provide more than half of his or her support. You might give some end-of-year support--perhaps a generous holiday gift--to push you over the threshold.

5. Medical expenses: Medical expenses are deductible to the extent your annual total exceeds 7.5% of your adjusted gross income (AGI). If you have cleared this threshold in 2010, you can schedule routine medical or dental examinations for December. Otherwise, you might postpone these visits.

6. Miscellaneous expenses: Similarly, you can deduct miscellaneous expenses only to the extent the annual total exceeds 2% of your AGI. Therefore, you might pay certain expenses--like safe deposit box fees or tax advisory fees--to maximize your deduction for 2010.

7. Energy credits: The tax law provides a residential energy credit for certain energy-saving installations made in 2010. If you qualify, you can claim a 30% credit up to $1,500 this year (reduced by the amount of the credit claimed in 2009).

8. 401(k) contributions: There is still time to boost your retirement nest egg by allocating part of your last paycheck to your 401(k) account. If you have cleared the Social Security wage base of $106,800 for 2010, you can use the payroll tax savings without reducing your take-home pay.

9. Hybrid vehicles: If you are in the market for a hybrid vehicle, make your purchase before 2011. You may be entitled to a special tax credit. Caveat: Credits are phased out for several popular models.

10. Mutual funds: Generally, it is beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) to avoid tax. Similarly, you may acquire shares after the ex-dividend date has passed.

Depending on changes in the tax law, you might bypass some of these ideas. Of course, everyone's situation is different. Obtain professional assistance in this area before you take any action.

State Tax Law

Although a state may wish to boost its economy by adopting some of the business incentive provisions, they cannot afford to create deeper revenue shortfalls. How the states respond to legislation impacts taxpayers in 2010 and subsequent years. This is especially true regarding a state's treatment of bonus depreciation and the increased Code Sec. 179 deduction which may also impact a decision to accelerate AMT and investment credit. The state's treatment of these and many other provisions should be a significant consideration when tax planning.

Future Legislation-Capital Gains

The Obama administration has proposed to increase the income and capital gains tax rates on single individuals with income of more than $200,000 and married couples with income exceeding $250,000. For S corporation shareholders, partners and sole proprietors who recognize income on their individual returns, following the traditional year-end planning maxim of deferring income into the next year may not be a positive tax strategy. Deferring too much income into 2011 could result in income taxed at a higher rate. These and other individual tax planning issues are discussed in, 2010 Year-End Tax Planning for Individuals.

Sole proprietors.

Sole proprietors have additional unique tax planning considerations. For a complete discussion on tax planning for the self-employed, see, Planning 2010: Tax Consequences for Self-Employed Individuals.

Health Insurance Deduction for purposes of self-employment tax. The 2010 Jobs Act amends Code Sec. 162(l)(4) to allow a deduction for self-employed health insurance costs in computing "net earnings from self-employment" for the 2010 tax year. Generally, the health insurance deduction does not reduce the income base for purposes of the Social Security Act. However, for purposes of calculating self-employment tax and the self-employment tax deduction, self-employed individuals may deduct health insurance costs incurred in 2010 for themselves, their spouses, their dependents, and (effective March 30, 2010) any of their children who as of the end of the tax year have not attained age 27.

2010 Year End Tax Planning for Businesses:

Tax planning for year-end 2010 presents new challenges for business taxpayers to reduce or defer federal income tax liability. Although traditional planning techniques remain fundamentally important considerations this year, there are new opportunities with recent legislation and changes in the tax laws. In addition, tax planning is complicated when considering the effective dates for many popular tax incentives, and anticipating those tax laws that may be put to a vote in Congress before year's end.

Alternative Minimum Tax for Businesses

The alternative minimum tax (AMT) is not a challenge reserved solely for the individual taxpayer. A corporation (or LLC that is taxed as a corporation) that is not a "small business corporation" may be required to pay AMT if:
(1) the corporation's taxable income (before any net operating loss deduction) plus AMT adjustments and tax preference items is more than $40,000 (or the corporation's allowable exemption amount, whichever is lower), or
(2) the corporation claims a general business credit, the qualified electric vehicle credit, or the credit for a prior year minimum tax.
The AMT income tax rate for businesses is a flat 20 percent.

Primary Residence-Capital Gain Exclusion

Generally, the home one lives in most of the time is one’s principal residence; it can be a house, houseboat, mobile home, cooperative apartment, or condominium.
In order to exclude gain on the sale of a home, a taxpayer generally must have owned and lived in the property as his or her main home for at least two years during the
five-year period ending on the date of sale. The maximum gain that can be excluded is $250,000 for individuals and $500,000 for married couples filing jointly.

IRA to Roth Conversion

The $100,000 modified adjusted gross income limitation and the joint return limitation are repealed for tax years beginning after 2009. Code Sec. 408A(c)(3). Thus, a taxpayer can convert an eligible retirement plan to a Roth IRA as long as the amount contributed to the Roth IRA satisfies the definition of a qualified rollover contribution.

A taxpayer has a traditional IRA with a value of $100, consisting of deductible contributions and earnings. He does not have a Roth IRA. The taxpayer converts the traditional IRA to a Roth IRA in 2010. As a result, $100 is includable in gross income. Unless the taxpayer elects otherwise, $50 of the income is included in income in 2011 and $50 in 2012. Later in 2010, the taxpayer takes a $20 distribution, which is not a qualified distribution and all of which is attributable to amounts includable in gross income as a result of the conversion. Under the accelerated inclusion rule, $20 is included in income in 2010. The amount included in income in 2011 is the lesser of $50 (half the income resulting from the conversion) or (2) $70 (the remaining income from the conversion), or $50. The amount included in income in 2012 is the lesser of $50 (half the income resulting from the conversion) or (2) $30 (the remaining income from the conversion, or $30.

Donation: Clothing & Household Items

Any donations of clothing and household items that are made to a charitable organization are not deductible unless the donated items are in "good " or better condition. IRS may deny a deduction for any item that has minimal monetary value. Donor of such items should be prepared to prove both the condition and the value of the donated items. Only one exception to this rule: If a single donated item is not in at least good condition, but it is worth more than $500, it is deductible, so long as a qualified appraisal is obtained at the time of the donation.

The Making Work Pay Credit

The Making Work Pay Credit provides employees, including the self employed, with up to a $400 tax credit ($800 for married people filing jointly). The credit is 6.2% of earned income and phases out

at modified AGI of $75,000 to $95,000 for singles or $150,000 to $190,000 for married people filing jointly. In 2009, taxpayers will receive the credit through a reduction in employee withholding and self-employed required estimated tax payments.

Offset Capital Gains with Losses

Net capital losses are fully deductible against capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 in net capital losses against ordinary income ($1,500 if married filing separately) or your total net loss as shown in 1040 Schedule D, Capital Gains and Losses, whichever is less. Any remaining capital losses may be carried over to future years.

Individual Retirement Account (IRA )

You may contribute up to $5,000 to fund a traditional or Roth IRA in 2009. Individuals age 50 or older by the end of 2009 can make an additional catch-up contribution of $1,000. If your spouse does not work for compensation, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your own earnings, with the same dollar

limits applying. However, the maximum aggregate that can be contributed to a Roth IRA is reduced by contributions made to other IRAs. Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Roth IRA contributions are not deductible, but the earnings accumulate tax deferred and may be withdrawn tax free if you meet the qualified distribution requirements.

For 2009, eligibility to contribute to a Roth IRA is phased out as modified AGI rises from $105,000 to $120,000 if single, head of household or married filing separately and not living with spouse at any time in 2009; and $166,000 to $176,000 if married filing jointly or qualifying widow(er). Married taxpayers who file separately and lived with a spouse at any time in 2009 cannot contribute to a Roth IRA if their income is $10,000 or more. Qualified dividend income from a domestic or qualified foreign company is taxed at a top rate of 15% (zero for taxpayers in the 10% or 15% tax brackets in 2009).

Mortgage Debt Forgiveness

If you still have mortgage liability after foreclosure, any amount forgiven by the lender is generally ordinary income. However, for debt discharged on or after January 1, 2007, and before January 1, 2013, the debt forgiveness is treated as tax free if the property is your primary residence. The limit on qualifying debt is $2 million ($1 million for a married person filing separately).

Interest and Property Taxes

Home mortgage interest on up to $1 million ($500,000 if married filing separately) of home acquisition loans secured by your principal residence and/or second home is fully deductible. You also may deduct mortgage interest on a home equity loan or line of credit up to $100,000 ($50,000 if married filing separately). Therefore, you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

First-Time Homebuyer Credit

The First-Time Homebuyer Credit increased to $8,000 in 2009 and is generally available for purchases made between January 1, 2009, and May 1, 2010, provided the home is occupied as the buyer’s principal residence within 24 months of the purchase. (Note: A first-time homebuyer is defined as someone who has not owned a principal residence in the three years before the purchase.) For purchases made after November 6, 2009, no credit is allowed if the purchase price exceeds $800,000. The credit only needs to be repaid if the home is sold within 36 months of the purchase date. For purchases made on or before November 6, 2009, the credit phases out for taxpayers with modified AGIs in excess of $75,000 ($150,000 for joint returns). The credit is refundable and recaptured if the home is sold within 36 months of the purchase date. For purchases made after November 6, 2009, the phase out starts at modified AGI of $225,000 for married taxpayers and $125,000 for all other taxpayers. The credit is completely phased out at modified AGI of $245,000 for married taxpayers and $145,000 for all other taxpayers.

Santa Clara County, Property Taxes

In Santa Clara County: If you're 55 or older, you can sell your appreciated primary residence to buy a new primary residence and pay the same property taxes if the value of the new home is equal or less than the old home. It can only be done once...

i.e. You bought a home for $500,000 for a primary residence in Santa Clara County. You sold it for $750,000. You bought a new primary residence for $750,000. You might be able to pay the old property taxes.