In 500 BC when Heraclitus of Ephesus said, “The only constant is change,” loose translations and last names hadn’t even been invented yet. But the timeless quote entirely describes today’s tax situation. As Congress balances a recovering economy against rising national debt and health care reform, there’s a good bet that the tax code will go through several major revisions in the coming years. To come out ahead, we suggest personal budgeting with free sites like Mint.com as well as creating a well thought out strategic budget and plan with your CPA, financial planner and estate attorney.
To start 2010 right, here are nine tax tips to help you prepare for tomorrow. Lest you allow change to take a big bite out of next year’s refund.
Tip 1: Cash in Today on Lower Capital Gains Rates
The Bush tax cuts, which included reductions in capital gains tax rates based on taxpayer adjusted gross income (the highest rate is 15 percent for individuals in the 25 percent to 35 percent tax brackets and taxpayers in the 10 percent and 15 percent tax brackets pay no capital gains), are scheduled to change in 2011. The top rate returns to 20 percent and the zero rate will revert to 10 percent. Though the lower rates may continue, the top capital gains rate is likely to increase. If you are in the higher income bracket, speak with your CPA and investment adviser about if cashing in now at the lower rates is the right plan for you.
Tip 2: Consider a Roth IRA Conversion
As mentioned in a previous tax tip, anyone can convert a traditional tax deferred IRA to a tax-free Roth retirement account in 2010, regardless of income. In prior years, the strategy was not available to people who made more than $100,000 AGI. For younger investors this is a good strategy to take advantage of long-term, tax-free growth on your money, but more established, affluent investors might consider a Roth IRA conversion as a good tax shelter, as capital gains tax rates are expected to rise in 2011. Though you will have to pay taxes on the previously untaxed amounts, you can split the liability between your 2011 and 2012 taxes. Though you may want to pay the full amount this year because …
Tip 3: It’s Time to Prepare for the Oncoming Tax Increase
Several Bush tax cuts expire at the end of 2010 with the top income tax rate scheduled to return to 39.6 percent (from the current 35 percent) and the 10 percent bracket set to be eliminated. Though the 10 percent bracket looks safe, affluent individuals will probably face increased taxes in 2011. Some have said that growing deficits might prompt early rate hikes, though the 2010 midterm elections should prevent that. Pay attention to Congress and the news about the tax panel headed by former Fed Reserve Chairman Paul Volcker for the latest on where personal income tax rates might go, and consider tax strategies like the Roth IRA Conversion and taking advantage of selling appreciated assets at lower capital gains rates as discussed in in Tip One.
Tip 4: Think Solar for the Long Run
Thanks to an environmental push in last year’s stimulus bill, the tax savings for energy-efficient home improvements were also improved. Rather than the confusing credit hodgepodge of the past, homeowners now can claim up to 30 percent of the first $5,000 spent on qualifying residential energy upgrades, or up to $1,500 in tax credits. Several upgrades, such as a solar home heating system, could net even bigger credits. Some solar energy packages recoup their investments in as little as five years, but you might need to act fast as the new credit format may end in 2010.
Tip: 5: Put the Family to Work
Consider hiring your children (over 14-years-old) and family members (grandma!) in 2010. You be able to shift some of your income that would be taxed at a higher rate to their lower tax bracket without being hit with kiddie taxes, but be careful because the income could affect their college financial aid.
Tip 6: Consider a Hybrid
Gas prices went down last year, but we know how quickly they can go up. Although the hybrid credit may be almost depleted in 2010 (it was introduced in 2006 and designed to phase out once an automaker sold 60,000 eligible vehicles), the plug-in credit should make a splash with the 230 mpg Chevy Volt and the 367 mpg Leaf set to debut this year. The $7,500 credit knocks a fair amount off the Volt’s estimated $40,000 price tag.
Tip 7: Gimme Shelter
The first-time homebuyers credit was such a hit, Congress not only extended it but also expanded it to people looking to purchase a second home. First-timers, individuals who haven’t owned a residence in the past three years, can claim up to $8,000 and repeat homebuyers who’ve lived in their homes for at least five consecutive years of the eight years prior to the purchase date can qualify for up to $6,500. Even though you may buy the home in 2010, you can amend your 2009 tax return to take advantage of the credit early. You must have a contract in place by April 30, 2010, and the deal closed by June 30 to qualify for the credit.
Tip 8: The Web Can Help
That box most use to make Facebook updates also hosts some great tax and money saving tools. Check out Mint.com for a free online budgeting system. It takes a bit to set up, but is extremely powerful. Also, before making purchases or even going out to eat, check out sites like Slickdeals, TravelZoo, Groupon and HalfOff Depot for excellent deals such as 50 percent off restaurants and deeply discounted airfare.
Tip 9: The Ultimate Tax Tip
If all else fails, few things are as valuable as a healthy sense of humor, so we leave you with this final tip from our friends at theOnion.com: Ask your friends for any old receipts they’re not using, then make up stories for each one to tell the auditors.
For more information on Budgeting, Forecasting and other tax strategies, please contact Brian Wendroff, CPA at Wendroff & Associate at 703-553-1099. Also, please look out for our upcoming QuickBooks Online Webinar and CEO Roundtable January 27. To find out more information about possibly joining the group, click here.