As we approach the close of 2010, there is still time to take steps that can reduce your 2010 tax bill. Year-end tax planning is more complicated this year due to: ongoing uncertainties regarding tax rates for 2011; questions as to when and if many popular tax breaks that expired last year will be extended; and short windows of opportunity to take advantage of recently-enacted tax breaks that are scheduled to expire after 2010. As we complete this letter, there is no assurance that Congress will resolve these issues by the end of this year. However, regardless of how and when these uncertainties are addressed, there are many “tried and true” year-end tax savings steps that you should consider for 2010, no matter what action Congress ultimately takes. Moreover, Congress has passed several tax bills this year that offer new tax breaks to individuals, many of which are temporary, and some that are available in 2010 only!
We are sending you this letter to remind you of the traditional year-end tax planning strategies that 1) help ensure your income is taxed at lower rates, and 2) will, in some cases, postpone taxes by deferring your taxable income and accelerating your deductions (so long as deferring income does not expose you to a significantly higher tax bracket in later years). This letter will also help you navigate through the many new tax planning opportunities available to individuals under recent law changes. Caution! Since many recently enacted tax breaks expire after 2010 (and others after 2011), it is extremely important that you be proactive and act timely to obtain maximum benefits! Tax Tip. Even though the recent recession has caused many individuals to experience a significant drop in income for 2010, this drop in income may actually produce additional tax benefits. If your income is down for 2010 as compared to recent years, you may be eligible for deductions and credits that you did not get in previous years because your income exceeded the phase-out thresholds. So, pay close attention to the income thresholds for the various deductions and credits discussed in this letter, which we highlight prominently in each section.
Planning Alert! Tax planning strategies suggested in this letter may subject you to an unexpected alternative minimum tax (AMT). For example, many deductions are not allowed for AMT purposes, such as: personal exemptions, certain standard deductions, state and local income taxes, and real estate taxes. Also, AMT can be triggered by taking large capital gains or exercising incentive stock options. Therefore, we suggest that you call our firm before implementing any tax planning technique discussed in this letter. You cannot properly evaluate a particular planning strategy without calculating your overall tax with and without that strategy. Please Note! This letter contains ideas for Federal income tax planning only. State income tax issues are not addressed.
Sincerely,
Matthew B. Hitt, CPA