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.