It's difficult to formulate a year-end plan in the current political environment. Nevertheless, following are seven sensible tax strategies for individual taxpayers in 2010. Caution: Tax rates are scheduled to go up next year, so consider the long-term implications of any year-end moves.
1. Generate energy tax credits. If you install certain energy-saving devices, you may qualify for the "residential energy credit." The credit for 2010 is 30% of qualified expenses up to a maximum credit amount of $1,500 (reduced by any credit claimed for 2009).
2. Audit-proof charitable gifts. A recent tax law change requires you to substantiate all monetary gifts to charity. Keep all the records required by the IRS now instead of trying to resurrect them at tax return time.
3. Harvest losses from securities sales to shelter previous capital gains. On the other hand, if you're showing a net loss for the year, you may trigger some capital gains before year-end. The earlier losses can shelter later gains from taxes.
4. Have a child trigger capital gains. For 2008 through 2010, the normal 5% rate for individuals in the regular 10% and 15% tax brackets is reduced to a rock-bottom 0%. But don't forget about potential "kiddie tax" complications.
5. Review alternative minimum tax (AMT) liability. You may be able to reduce or eliminate the damage by postponing tax preferences to 2011. However, if you definitely will pay the AMT in 2010, you might accelerate taxable income into this year if the extra income will be taxed at a lower rate than your normal rate.
6. Seek a tax underpayment shelter. To avoid an "estimated tax" penalty for an underpayment, meet one of these three safe-harbor rules.
- Pay at least 90% of the current year’s tax liability.
- Pay at least 100% of the prior year’s tax liability (110% if your AGI for that year exceeded $150,000).
- Pay installments under a special annualized basis. This option is only available if you receive more income on a seasonal basis.
7. Sell real estate on the installment basis. As long as at least one payment is received in the year after the year of the sale, you're taxed on just the portion of each payment attributable to the gain for each year, plus the interest.
8. Prepay property taxes. In the tax world, the early bird gets the worm. This is particularly true for property taxes. Paying property taxes by year-end rather than waiting until the due date of Jan 31st allows you to take the deduction in 2010.
9. Consolidate personal loans with a home equity loan and deduct the interest. Normally, you cannot deduct interest payments made on personal loans. (There is a limited exception for student loans.) Convert non-deductible personal debt into deductible home equity debt. This way, you can deduct the interest on up to $100,000 of the home equity debt, regardless of how you use the borrowed funds. With interest rates at an all time low this is the best time you will ever get to refinance your home.
10. Bunch up medical expenses. Many taxpayers don’t qualify for the medical expense deduction. Reason: Unreimbursed expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income. Try to bunch payments into one calendar year rather than spreading out payments over two years. (Things will get even tougher in 2013 when the deduction threshold increases to 10% of AGI due to the health care law passed earlier this year.)
11. Lock in higher-education tax breaks. The tax law provides some relief to parents who put their kids through college and grad school. But the tax benefits phase out for certain high-income taxpayers. Strategy: Pay the tuition bill before Jan. 1st as long as the related education will begin in the first three months of next year.
These are only eleven potential tax moves to make at the end of the year. Others may be appropriate for your situation plus every situation is different. Contact our office at 857-8158 or email me at wayne@wjb-cpa.com to discuss the possibilities or ask any questions.