Last Updated: October 18, 2010
About the last thing anyone wants to do at holiday time or frankly any time is think about taxes, but 2010 tax year provides an exceptional challenge to taxpayer. At this point we don't know what tax rates will be in 2011. Unless Congress takes action tax rates will revert to 2001 levels with highest tax rates of 39.6 percent. From a conservative standpoint we can only assume they will be higher.
We also don’t know if the Alternative Minimum Tax (AMT) patch will be instated again this year thus creating an increase in this year’s Federal taxes. So this year is an especially important year to review your year end tax situation with your financial planner. Make sure you've taken advantage of any expiring tax benefits before year’s end, and determine whether you should accelerate or defer income to reduce not only this year’s but also next year’s tax liability.
Here are some tax tips that might make a difference on your tax return:
Face the AMT. The Alternative Minimum Tax was designed over 40 years ago to tax those taking advantage of tax loopholes. It is not adjusted for inflation but every year Congress adjusts the amount upward. To date in 2010 there has not been a patch and if 12/31 comes around without an adjustment, the AMT exemption level will drop, affecting joint earners with income greater than $45,000 and single or head of household incomes of $33,750.
Any of the following factors besides your income could trigger the AMT based on their size and amount:
- State and local taxes paid
- Deductible medical expenses
- Capital gains
- Miscellaneous itemized deductions
- The bargain element of stock options
In order to reduce income subject to AMT, defer that income, and those deductions. Make sure you've reviewed all deductions you're eligible to take while looking for opportunities to defer income into the next year to save money on taxes. Likewise, see if you can push your annual bonus into next year to cut your tax bill.
Do a last-minute energy review. The Energy Efficiency Home Improvement Tax credit expires in 2010 and the 30 percent tax credit drops to 10 percent. If you have plans to install heating or cooling equipment, new windows, or other eligible home improvements, do them by the end of the year.
Contribute to those retirement accounts. If you haven't elected to participate in your company's 401(k) plan or don't have a Traditional Individual Retirement Account (IRA) or Roth IRA, make this the year you change that. You have until April to open an IRA and make a deposit. Make a resolution to put the maximum into your company's retirement savings plans. You're not only saving money on taxes, you're planning for your future.
Increase deductions to reduce this years taxes. See if you would benefit by paying next year's quarterly state and federal tax early and see if you can squeeze in your January mortgage payment before Dec. 31. That means more deductions in the year. If you moved more than 50 miles to work at you your new job you can deduct your moving expenses.
If you closed on a new primary home prior to September 30, 2010, and are a “first-time” homebuyer, you can qualify for a tax credit of 10 percent of the purchase price up to $8,000.
Sell some losers. Do a portfolio and tax review and take the losses you’ve realized in taxable accounts to offset capital gains for the year. Your capital losses offset capital gains. After that you can deduct up to $3,000 in losses against income.
Give to charity. Both cash and property donations can be deducted for the current year, but be circumspect about getting receipts for items exceeding $250 or more in value. If you're 70½ or older, you can make tax-free distributions from your IRA directly to a charity — this can be particularly effective for those whose charitable deductions already exceed income limitations.
Give to the kids. Gifts of up to $13,000 per child don't need to be reported. Also check whether it makes sense to deposit that gift in a 529 College Savings Plan.
Check your sales tax payments. If you paid a significant amount of sales tax when purchased your car or boat, you have the option of choosing between deducting your state income taxes or state sales taxes for the maximum benefit to your tax situation as long as you itemize on your tax return.