This article is contributed by Shanie McCarty, CPA with Galanti & Co in Dunwoody, GA. Shanie’s bio is at the end of this article.
With the end of the 2010 swiftly approaching and the current uncertainty in Congress, year-end tax planning is more important than ever this year. As you may be aware from media sources, the Economic Growth Tax Act of 2001 is set to expire on December 31, 2010. At this time, there is much speculation as to what tax benefits, rates, and credits will be extended or made permanent.
- The current marginal tax brackets (ranging from 10% to 35%) will revert back to the previous rates (ranging from 15% to 39.6%).
- Certain high-income taxpayers will lose a portion of their itemized deductions and personal exemptions.
- The current maximum child tax credit of $1,000 will revert back to $500.
- The current long-term capital gain rate (ranging from 0% to 15%) will revert to 10% and 20% (depending on the total income of the individual)
- Certain qualified dividends (typically defined as dividends received from domestic corporations) currently taxed at a maximum 15% will revert to taxation at the individual’s ordinary marginal rate (up to 39.6%).
In light of these potential expirations, certain tax planning strategies can be executed:
- Accelerating income into 2010 (receipt of year-end bonus or selling appreciated property by 12/31/10)
- Delay of itemized deductions until 2011 (pay your January mortgage payment on Jan. 1st as opposed to the end of December, delay payment of charitable contributions to January)
- Payment of state estimated tax payments in Jan 2011 as opposed to Dec 2010 (statutory due date is 01/15/11, but the payment is deductible in the year paid)
- Medical expenses and miscellaneous business expenses are deductible as itemized deductions on to the extent they exceed a percent of your adjusted gross income (7.5% for medical and 2% for miscellaneous). Consider accelerating or delaying such expenses into the same calendar year to “get over” the percent threshold.
- Regardless of current tax law, it is typically advantageous to maximize contributions to your company’s 401K plan or Traditional IRA account.
Of course, it should be said Congress has proposed several modified extenders of the above mentioned benefits. The next month will be an important time to observe the news from Washington as any tax planning strategies mentioned above may not be the best course of action, depending on what lawmakers pass.
Much buzz also surrounds the conversion of a traditional IRA to a Roth IRA in 2010. Basically, contributions to a Roth IRA are made with after-tax dollars (no tax deduction is allowed for the contribution), but all future distributions received are tax-free (resulting in permanent tax-deferral on the earnings). For 2010, any taxpayer is allowed to convert a traditional IRA to a Roth IRA, regardless of their income level and you may also split the conversion income between 2011 and 2012. Since the conversion is taxable in the year converted, this can be extremely beneficial if you expect your 2010 income to be low and you have itemized deductions to offset the income from the conversion or if your IRA has declined in value. In case your situation changes after the conversion, it can be reversed anytime before you file your 2010 income tax return.
For businesses, Congress did pass the Small Business Jobs Act of 2010 in September. A few key provisions from this act include:
- The extension of bonus depreciation until 12/31/10 (allows a business to directly deduct 50% of the cost of certain new equipment purchased in 2010)
- Increase of the Section 179 Expensing (allows a business to directly write-off 100% of the cost of certain new equipment purchased in 2010, up to $500,000 if total purchases are under $2,000,000 for the year)
- Certain small businesses may be allowed to “carryback” a net operating loss incurred in 2010 to prior tax years (able to receive a refund of tax previously paid)
Business owners should keep these provisions in mind when planning purchases by the end of the year. It may be best to accelerate the deduction into 2010 to take advantage of the favorable deductions.
Of course, understand the above tips are general advice and every taxpayer’s situation is unique. I recommend you consult your tax advisor to further discuss tax planning strategies that will most benefit you.
Shanie S. McCarty, CPA is a partner with Galanti & Co, P.C., a full-service CPA firm located in Dunwoody, GA. She is a graduate of University of West Georgia with a B.B.A. in Accounting. She has 18 years of experience in offering tax, consulting ,and auditing services to both individual and closely-held businesses, with particular specialization in construction and professional service entities. Contact information is 770-393-0399 or firstname.lastname@example.org. Please visit our website at www.galanticpa.com