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Year End Planning Can Lower Tax Bills by Beth Jones, RLP®

As the 2010 year end approaches, we may be too preoccupied with holiday plans to think about our taxes. The Bush tax cuts are set to expire at the end of 2010, so 2011 taxes could rise to as high as 39.5 percent on income and dividends and 20 percent on capital gains.

Opportunities for minimizing tax liabilities
First, you’ll need your prior year’s tax return, as well as your current paystubs and account statements. Based on this information, you can make some rough projections regarding your tax bill. If you’re in a position similar to last year, you can expect a similar outcome; if your situation has changed dramatically, you may need to revise your potential tax liabilities up or down.

Consider the following:
Are you withholding the right amount?

  • If you anticipate owing taxes, increase your federal income tax withholding to avoid owing a potential penalty.
  • If you anticipate a large refund, decrease your withholding so you can receive your money now rather than waiting for a refund check.

Subject to the alternative minimum tax (AMT)? The AMT attempts to ensure that high-income individuals pay a minimum tax amount. Following are possible triggers for the AMT:

  • Large numbers of personal exemptions
  • Itemized deductions for medical expenses
  • Deductions for state, local, personal property, and real estate taxes
  • Home equity loan interest where the financing isn’t used to buy, build, or improve your home
  • Exercising incentive stock options
  • Large miscellaneous itemized deduction amounts from items such as investment expenses and unreimbursed employee business expenses

Calculate your regular income tax on Form 1040; then consider your potential AMT liability using Form 6251. If you are subject to AMT, you should consult a tax professional.

Should you change the timing of your income and deductions? Federal income tax rates are scheduled to increase in 2011, unless Congress acts before the end of the year. With the uncertainty around income tax rates for 2011, you may benefit from some last-minute moves to either accelerate or delay your income and/or deductions. If you expect to be in a higher tax bracket next year, you might want to accelerate income into this year so you will pay tax on it this year. If you are in the higher marginal tax brackets, you also may want to accelerate deductions in order to pay less tax this year. In 2010, there is no reduction for itemized deductions for higher-income taxpayers, but the phase-out of deductions returns in 2011.

To accelerate income into this year:

  • Consider selling capital gain property you anticipate selling in 2011.
  • Convert a traditional IRA to a Roth IRA.

To accelerate deductions into this year:

  • Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction.
  • Prepay deductible interest.
  • Pay real estate, state, and local taxes before year-end.
  • Take deductions and credits that are only available for 2010, such as the energy efficient home improvement credit.

Consider non-charitable gifts in 2010 and 2011, you can give up to $13,000 ($26,000 for married couples) to as many individuals as you choose, without incurring any federal gift taxes. Transferring assets during life can save on future estate and gift tax bills.

Maximize contributions to retirement saving. Depending on your personal financial situation, you may be eligible to make tax-deductible contributions to an IRA, or you can contribute after-tax dollars to a Roth IRA (qualified distributions will be tax-free). If you are contributing to an employer plan, you may want to make the maximum pretax contribution.

Update your estate plan. Review and update your estate plan to account for any changes in your financial life, circumstances, or tax laws to ensure that your asset titling and beneficiary choices are still in line with your plans.

Special considerations for business owners
Business owners have other tax considerations. Consult a professional for assistance with your situation.

Expensing of business property. For 2010, small businesses are allowed up to 50 percent additional depreciation for qualifying property purchased and placed into service before December 31.

Corporate employee-shareholders. If you are an owner of a corporation who also works in the business, you need to consider employment taxes in your salary structure. Medicare tax, in particular, is not capped and will be levied against all income received as salary. Look at your salary level and company income distribution for opportunities to reduce your taxes. The IRS expects you to take a reasonable salary, so you’ll want to consult a tax professional.

Leverage your gift tax exclusion with your business. You may be able to gift ownership interests that are eligible for valuation discounts. Structures such as family limited partnerships (FLPs) and LLCs can also provide valuation discounts when interests are transferred. These discounted gifts can help transfer assets to save future estate or gift taxes and can be made a regular part of the year-end tax review routine.

Stay tuned to breaking news coming from Congress at the end of this year, which may give you a last-minute opportunity to reduce taxes. With a bit of effort and some professional assistance, you can pave the way for happier tax years to come.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult your tax or legal professionals regarding your individual situation.



Beth Jones, RLP® is a Registered Life Planner and Financial Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or www.thirdeyeassociates.com. Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.



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