Tax Planning

This letter is intended to encourage you to get started with your planning.  On the income side, you will want to look for opportunities to generate tax-deferred, tax-free, or lower taxed income.  On the expense side, be alert for deductible expenses, as well as expenses that may qualify for a tax credit.   Not every suggestion or option mentioned will be appropriate for your particular situation. 

Your Investments

• The maximum long-term capital gains and qualified dividends is 15%.  This rate falls to zero if you’re in the 10% or 15% tax brackets for ordinary income.  These those two brackets currently apply when you are married filing jointly and your taxable income is less than $68,000 ($34,000 if you are single)
• After the temporary rules end on December 31, 2010, selling appreciated investments may cost you more in taxes, but making sales in the current year takes advantage of lower rates.  This can put you in a higher income bracket and affect income-limited deductions and credits.
• Rather than selling, other forward-looking tax strategies might better suit your overall goals. 
• Since after this year it is likely that dividends will once again be taxes at your ordinary income tax rate, you could choose to invest in stocks with growth potential instead of paying current income in the form of dividends.
• If tax rates go higher, you might want to look at investing in tax-free municipal bonds. 
• Also, when you rebalance your portfolio, you might consider increasing your investment in mutual funds with low turnover rates.  Here, you will reduce taxable capital gains in future years.
• Gifts of stock to your family members or charities will reduce the amount of capital gains tax you will pay now and in the future.
• The income and filing status on converting a traditional IRA into a Roth IRA no longer applies.
• The income produced from the conversion will be taxed over the next two years (2011 and 2012). Future withdrawals will be tax-free and there is no required minimum distribution.
• As of now, WI has not adopted this law.  In fact for 2010 IRA conversions into Roth IRAs could be subject to penalties.  If the taxpayer has AGI over $100,000 and the person is under age 59 ½, the person would be subject to an early distribution penalty.  The penalty is 3.33% of the amount converted.  The person would also be subject to a 2% penalty for excess contrition to the Roth IRA and would apply each year until the money is withdrawn.           
• Capital losses.  Although nobody likes losses, they can help you at tax time.  You can offset capital gains plus an additional $3,000 of ordinary income annually.  You can carry forward your losses to future years.

Your business

• If you operate your business as a C corporation, think about making dividend payments during 2010.  Although dividends may not be appealing because they are not a business expense and you have to report them on your personal return as income, 2010 could be a good time pay dividends because of the preferential tax rates expiring.
• A new law signed November 6, 2009 expanded the longer carryback period to include business of any size.  The NOL carryback is generally available for NOLs incurred in either 2008 or 2009.

Family Matters

• Dependent care credit.  If you pay child-care expenses (for a child under age 13) so that you (and your spouse) can work or look for work, the maximum tax credit is $3,000 per dependent.
• This includes the cost of sending a child to summer day camp.  No credit is allowed for the cost of an overnight camp.
• Hiring your child.  If you own a business, giving your child a job could be a tax saver.  A dependent child can earn $5,700 in 2010 income tax-free because of the standard deduction.  You will be able to deduct the wages from your business income, reducing your income taxes and possibly your self-employment taxes.
• Helping a parent.  You may be able to claim a parent as your dependent, if your parent’s gross income, not counting nontaxable Social Security benefits, is no more than the exemption amount (estimated to be $3,650 for 2010) and you provide more than half of your parent’s total support.
• Divorced parents.  Whoever pays for medical expenses, whether you claim the dependency exemption for the child or not, you can deduct the expenses as an itemized deduction (subject to the 7.5% floor).

Going Green

• REEP (Residential Energy-Efficient Property) credit.  There is a 30% credit for installing solar electric and hot water systems, geothermal heat pumps, small wind turbines, and fuel cell systems.  No dollar cap on this credit.
• Nonbusiness energy property credit.  You may benefit from a 30% tax credit for qualified energy-efficient improvements (subject to a combined $1,500 credit limit for 2009-2010), assuming they meet energy-efficient improvements.
• Insulation                                                                     
• Exterior windows and skylights
• Exterior doors
• Roof (asphalt, metal)
• Central air conditioning
• Advanced main air circulating fan
• Water heater (natural gas, propane, oil, electric heat pump)
• Hot water boiler (natural gas, propane, oil)
• Electric heat pump
• Alternative motor vehicle credit.  The purchase of an IRS-certified hybrid, plug-in electric, alternative fuel, or advanced lean-burn technology vehicle.

Education

• American Opportunity Tax Credit.  A maximum credit of $2,500 for each eligible student, available for the first four years of college, for tuition payments and certain related expenses (including books and other required course materials).  This credit phases out with AGI between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers).
• Lifetime Learning Credit. A maximum credit of $2,000 (20% of up to $10,000 of qualified tuition and related expenses) for each year of post-secondary education.  This credit will phase out between $50,000 and $60,000 ($100,000 and $120,000 on a joint return).  You may not claim both education credits for the same dependent in a given tax year.  Also neither credit is available to taxpayers married filing separately.
• 529 Plans.  Although no deduction for your federal contributions, contributions up to $3,000 per beneficiary each year are deductible for Wisconsin.  You are not taxed on investment earnings while your money remains in the plan and distributions for higher education expenses are tax-free.  For 2010, higher education expenses include computer technology, equipment, and related services (including Internet access).
• Wisconsin allows a $6,000 per student income subtraction.
• Student loan interest.  $2,500 annual deduction.
• Student loans are not limited to those taken out for undergraduate work.  Eligible student loans include graduate and post-graduate programs.
• Coverdell ESA.  This education savings account is similar to a 529 plan; however ESA contributions are limited to $2,000 per beneficiary.  This limit is proposed to drop to $500 per beneficiary after 2010.
• If you use an existing ESA to pay for a child’s elementary or secondary school tuition or related costs, you should consider doing it in 2010.  Unless Congress changes the law, withdrawals for qualified elementary and secondary school expenses will no longer be tax free after 2010.

Retirement planning

• ·Workplace plans.  401(k) plans, 403(b) plans, and SIMPLE plans offer the opportunity for you to invest by contributing a portion of your pay along with a company match.  Plans include the following tax benefits:
• Pretax contributions.  The salary that you contribute is not subject to income tax until you take distributions from the plan
• Tax-deferred earnings.  Your earnings will grow tax-free and you will ultimately pay tax when you withdraw the money.
• Roth option.  You will pay tax on your contributions, however your earnings grow tax-free as well as your distributions are tax free.
• IRA.  You will be eligible to contribute to a traditional IRA if you (and your spouse) are not eligible to participate in an employer’s retirement plan.  Your contributions are tax deductible.
• Roth IRA.  The contributions are nondeductible and potentially tax-free withdrawals after five years if:
• You are at least 59 ½
• You pay up to $10,000 of first-time homebuying expenses
• You are disabled
• Distributions from an IRA.  If you withdraw before you are 59 ½ there is a 10% penalty in addition to income taxes
• Exception.  You can take amounts from an IRA early without penalty to pay qualified higher education expenses or first-time homebuying expenses up to $10,000.

Deductions

• Charitable contributions.  You must have records to support your deduction.  Keep in mind, if you plan to make a large donation you may be limited by a percentage-of-income ceiling.
• Volunteers.  You may be able to deduct various unreimbursed expenses (gas or oil for your car, supplies, uniforms, travel costs)
• Mortgage interest and taxes.  You may be able to deduct interest paid on $1 million of debt incurred to acquire your principal and/or a second residence, as well as interest paid on $100,000 of home equity debt, as an itemized deduction.
• Office in the home.  If you own a home-based business, and use the space regularly and exclusively for business, you may be able to deduct various expenses (electricity, heating/cooling, insurance, etc).
• Deduction floors.  Like many taxpayers, you may assume that you won’t qualify for the medical expenses deduction because of the 7.5% floor.  However, keep in mind that health insurance premiums, prescriptions, co-pays, deductible, and other out of pocket expenses can add up quickly.  Also if you travel, don’t forget to include your eligible medical travel costs.

Quick facts for 2010

Retirement Plan Contribution Limits

Filing deadlines

• April 15^th for individuals and partnerships
• March 15^th for calendar-year corporations
• Extensions can be filed, giving individuals and corporations an additional six months to file (but not to pay the taxes)
• Extensions for partnerships can be filed, giving them an additional five months to file

Don’t let this year pass without devoting some time to planning that can potentially lower your taxes and help you achieve your financial goals.  Please call us now and let’s get together to put a tax plan into action for you.