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Alas, another election has passed, and major changes should be in effect with the Republicans winning control of the House and picking up seats in the Senate, especially the future of the Bush Tax Cuts, whether to “patch” the AMT for 2010 and/or extend a number of tax provisions that expired in 2009.
In short, Tax Planning has rarely been more important or more challenging. That is why we have compiled the following year-end tax planning checklist to help you reduce your liability, regardless of how Congress votes in the future. Please review the following list and contact an associate at WendroffCPA if we can help you on which tax moves to make this year. Because there is no such thing as a “lame-duck” CPA at Wendroff & Associates.
Year End Moves for Individuals
• If you set aside too little this year for your employer’s health flexible spending account (FSA), look to increase the amount for next year. Don’t forget that you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids (2010 is the last year that FSAs can be used for nonprescription drugs).
• Realize stock losses while preserving your investment position. For example, you can sell the original holding then buy back the same securities at least 31 days later. Consider speaking with your CPA or financial advisor to discuss year-end trades to consider.
• Increase your withholding if facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.
• Take an eligible rollover distribution from a qualified retirement plan before yearend if facing a penalty for underpayment of estimated tax (and the increased withholding option is unavailable or won’t sufficiently address the problem). Income tax will be withheld from the distribution and will be applied toward the 2010 taxes. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax year to reduce previous underpayments of estimated tax.
• Make energy saving improvements to your home, such as extra insulation or installing energy saving windows, and qualify for a 30% tax credit. The aggregate credit for energy efficient improvements to the home in 2010 is $1,500. Unless Congress acts, this tax break might not be around next year.
• Convert your traditional IRA into a Roth IRA if you expect to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your 2010 AGI. Though, you can choose when to pay the tax on the conversion, either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.
• Purchase Qualified Small Business Stock (QSBS) before year end. There is no tax on gain from the sale of this stock if (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify, the stock must be issued by a regular C Corporation with total gross assets of $50 million or less and some other requirements. Talk with your CPA or Financial Planner if considering this strategy.
• Make exclusion gifts before year end to save gift tax (and estate tax if it is reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals gift tax free. However, you can’t carry over unused exclusions from one year to the next.
Year End Moves for Business Owners
• Hire a worker who has been unemployed for at least 60 days before year end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer’s 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit up-to-$1,000.
• Put new business equipment and machinery in service before year-end to qualify for 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won’t be available after 2010.
• Make expenses qualifying for the $500,000 business property expensing option. The max amount you can expense beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation). Something to consider if tax rates go up for 2011 and future years, and you’d rather have more deductions after 2010 than for 2010.
• Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.
• Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. You can do this by the shareholder personally loaning money to the company or contributing more money to the company called additional paid in capital.
• Consider whether to defer cancellation of debt income from the reacquisition of an applicable debt instrument in 2010. The business can elect to elect to have the COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).