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TAX TIPS - 2010 Tax Law Changes & Year-end Planning

 Here´s what´s new for 2010 or continuing from 2009:

• Making Work Pay Credit – A credit for those who earned income from a job, equal to the lesser of 6.2% of earned income or $400 – $800 if married filing jointly. 2010 is the second and final year for this credit.
• Economic recovery payment (ERP) – The ERP was a 1-time payment in 2009. However, if you should have received the payment in 2009 and didn´t, you´ll receive the payment in 2010. The ERP isn´t taxable, but it reduces your Making Work Pay Credit. The payment is $250 to those who received:
  • Social Security benefits
  • Supplemental security income
  • Railroad retirement benefits
  • Disability or pension benefits from the Department of Veterans Affairs
    

• U.S. Series I Savings Bonds – You can buy these with your refund without setting up a TreasuryDirect account in advance.
• Home-mortgage principal reductions – You don´t have to pay tax on Pay-for-Performance Success payments to reduce your mortgage principal.
• American Opportunity Credit – This modified Hope Credit for education was increased to $2,500 for most taxpayers. This credit is 40% refundable, so it could increase your refund.
• Alternative Minimum Tax (AMT) exemption amounts decreased to:
  • $33,750 for single or head of household
  • $45,000 for married filing jointly or qualifying widow(er)
  • $22,500 for married filing separately
    

• IRA deduction expanded – You might be able to claim a deduction if both of these apply:
  • You were covered by a retirement plan.
  • Your income was less than $66,000 – $109,000 for married filing jointly or qualifying widow(er)

If your spouse was covered by a retirement plan but you weren´t, you might be able to claim a deduction if your income was less than $167,000.

• First-time homebuyer credit – You might qualify for a credit of $4,000 if both of these apply:
  • You entered into a binding contract to purchase a home on or before April 30, 2010.
  • You closed on the purchase of that home by Sept. 30, 2010, provided the home was originally set to close before the original June 30 deadline.

If you move out of the house or sell it within 36 months after you bought the home, you must repay the credit.

• First-time homebuyer credit repayment for 2008 buyers – If you bought a home in 2008 and claimed the first-time homebuyer credit, the repayment provision kicks in this year and you´ll owe the first of the 15 installments this year. Each installment is $500.
• Energy property credits – You might be able to claim this credit for energy-saving items for your home.
• Child tax credit has increased for some people.
• Standard mileage rates are now:
  • 50 cents a mile for business use of vehicle
  • 16.5 cents a mile for medical care
    

• Personal casualty and theft loss limits – You can deduct losses of more than $100. To figure your loss, you must:

1.             Subtract $100 from each casualty.

2.             Total all casualty losses.

3.             Subtract 10% of your AGI from the total of all casualty losses.

                   Earned Income Credit (EIC) maximum income changes are:

o    3 or more children lived with you and you earned less than $43,352 – $48,362 if married filing jointly

o    2 children lived with you and you earned less than $40,363 – $45,373 if married filing jointly

o    1 child lived with you and you earned less than $35,535 – $40,545 if married filing jointly

o    No children lived with you and you earned less than $13,460 – $18,470 if married filing jointly

o    The maximum investment income you can earn and still get the EIC increased to $3,100.

o    Divorced or separated parents – Noncustodial parents can´t attach part of the divorce decree anymore. You must attach Form 8332 or a similar document that has all the same information as a Form 8332 that is signed by the custodial parent for the noncustodial parent to be allowed the dependency exemption.

o    Definition of a qualifying child changes:

§  The child must be younger than you, or permanently and totally disabled.

§  If the parents could claim the child but don´t, anyone trying to claim the child must have a higher AGI than either parent.

§  If you don´t claim an exemption for your child, you can´t claim the child tax credit for them.

                Child´s investment income tax – The amount of tax-free investment income for a child has increased to $1,900.

                Elective salary deferrals:

o    Maximum amount is $16,500 if no exceptions

o    Maximum amount is $11,500 if you have only SIMPLE plans

o    Maximum amount is $19,500 if you have only 403(b) plans and you qualify for the 15-year rule

o    Catch-up contributions for taxpayers over age 50 has increased to $5,500 – except for Section 401(k)(11) and SIMPLE plans

Year-end Planning

Overview

• Schedule end-of-year appointments or buy new prescription glasses or contacts to avoid losing unused money set aside in your flexible spending account.
• Contribute to or open a qualified retirement plan by the end of the year (April 15 for IRAs) to lower your taxable income.
• Donate by Dec. 31 and deduct charitable contributions on this year's return if you itemize your deductions.
• If you're self-employed, delay your December billings until January to reduce this year's taxes.

Before Dec. 31, think about how you can help your tax situation for this year. By following year-end tax tips, you can prepare in 2010 to save on taxes due April 15, 2011.

Compare standard versus itemized deductions — If your current or planned 2010 itemized deductions are more than your standard deduction, you'll save tax dollars by itemizing.

If your itemized deductions are close to your standard deduction in 2010, consider shifting some of your deductions to 2011, when you might be able to itemize more. Conversely, if you know you won't have as many itemized deductions in 2011 as you do in 2010, consider shifting some deductions from next year to this year.

Ex:

• If you can't itemize in 2010 but can in 2011, consider making your annual charitable donation in January instead of December.
• If you're itemizing in 2010 and can pay real-estate tax in 2 installments, consider making the payment in 2010 that would normally be due in early 2011.

Remember your miscellaneous itemized deductions — If the total of your miscellaneous itemized deductions subject to 2% of your adjusted gross income (AGI) is close to or more than 2% of your AGI, consider if you need any items in this category. If so, buy them before the end of the year. If the total of these expenses isn't close to or more than 2% of your AGI, postpone these expenses until 2011 if possible.

See IRS Publication 529: Miscellaneous Deductions to learn which items are in this category.

Make flexible spending work for you — If you don't have enough medical expenses in 2010 to meet the amount you set aside in your flexible spending account, you'll lose the money. If you have extra money in the flexible spending account to spend, you might want to:

• Schedule end-of-year appointments
• Buy new prescription glasses and contact lenses
• Buy hearing aids
• Buy medicines you'll need in 2011

Submit your receipts for eligible expenses within the time required by the plan. Some plans allow you an extra 2 1 / 2 months after the end of the year to use the unspent amount – check with your plan administrator.

Review your medical costs — Keep track of your unreimbursed medical expenses all year long. You can deduct them only if they're more than 7.5% of your AGI. If you're close to the 7.5% requirement, you might consider having an elective or necessary procedure before year-end.

Check that the procedure is among the qualifying deductible expenses. Many elective procedures don't qualify for this deduction.

Get serious about retirement — One way to lower your taxable income for the year is to contribute to a retirement plan, like a:

• 401(k)
• 403(b)
• Deductible IRA
• SIMPLE IRA
• SEP

You have until December 31 to make contributions to 401(k)s and 403(b)s for 2010. You have until April 15 to make contributions to IRAs and some other plans. Check with a tax professional to determine which plan is best for you.

Adopt a charitable attitude — Donating clothing and household goods to charities before Jan. 1, 2011, is a good deed that's also deductible on your 2010 return. Get a receipt from the organization you're donating to. The deduction is limited to the item's current fair market value – what you could sell it for at a garage sale.

Sell off securities — If you have a large net capital gain so far this year, you might want to sell some stock to generate a loss before year end. Doing so could reduce the amount of tax you pay this year. However, if you sell stock to generate a loss, you're prohibited from purchasing substantially similar stock for 30 days before or after the sale that generated the loss.

However, if the securities you sell are mutual-fund shares, you might be able to reinvest the proceeds in a similar – but not identical – fund, maintain your investment strategy, and deduct the loss. Whatever you do, don't let possible tax savings cause you to make a decision contrary to your investment interests.

Investigate before buying mutual funds — If you're planning to invest a substantial amount in a mutual fund, confirm that the fund isn't declaring a large amount of dividends in December. If you buy shares before the dividend is declared, you'll increase your income by the amount of the dividend even if you reinvest the dividend in new shares. You can get this information at the fund company's Web site.

Give the gift of cash — You can give a gift up to $13,000 to any 1 individual free of gift tax. If you're married, you each can gift a person up to $13,000 tax free -26,000 in total. In most cases, the gift isn't complete until the recipient of a check cashes or deposits it. So, confirm the recipient does this by the end of the year.

Don't let extra money sit around — If you have a large amount of cash to invest and want to shift some of your income to 2011, consider investing in a short-term CD or a U.S. Treasury bill that matures in 2011.

Employ self-employment strategies — If you're self-employed and use the cash method of accounting, you can decrease your 2010 taxable income by:

• Delaying your December billings until January
• Setting up a qualified self-employed retirement plan (SEP)
• Buying supplies and equipment this year instead of next

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