Posts Tagged ‘tax savings’

Tax Breaks for this Filing Season

Wednesday, February 9th, 2011
Carolyn Valenti, Partner
 
Despite calls for simplifying the tax laws, they have actually been made much more complicated in the last few years. Year after year, there have been numerous tax changes that even some professionals have a tough time keeping up with. This filing season is no different. The 2010 Form 1040 reflects a number of new tax breaks. Some are straightforward. Others are complex. Some present choices. But they all provide an opportunity to save money.

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How the Bush Tax Cuts Affect Tax-Savings Strategies

Tuesday, November 2nd, 2010

Each November, we like to look at the steps you can take to reduce your tax bill. This year, it’s a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.

The “Bush tax cuts” refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings. (more…)

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One-Year Repeal Could Mean Tax Savings For You

Tuesday, February 9th, 2010
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For years, higher-income taxpayers have worried about their itemized deductions and personal exemption write-offs being phased out. This means that they didn’t get the full benefit of the most popular itemized deductions such as
Warning: IRS Wants Businesses
To Disclose “Uncertain Positions” The IRS has proposed significant changes to the reporting requirements of some business taxpayers by making them identify “uncertain tax positions.” These are basically strategies taken on tax returns that might not ultimately be accepted by the IRS.
Many businesses are required under Financial Accounting Standards Board Interpretation No. 48 (FIN 48) to disclose uncertain tax positions for accounting purposes. This would mean they also must disclose them to the IRS.
Here are the basics:

  • Reporting would be required when returns are filed.
  • Businesses required to comply would need assets of more than $10 million and have a financial statement prepared under FIN 48 or similar accounting standards.
  • The annual disclosure would include a concise description of the positions and the maximum amount of tax exposure if the position is not sustained. It would not require disclosure of the taxpayer’s risk assessment or tax reserves.

This information would give the IRS a leg up in audits. IRS Commissioner Doug Shulman noted examiners spend 25 percent of the time in a corporate audit searching for issues. “It would add efficiency to the process if we had access to more complete information earlier in the process…” he stated.
It’s unclear when the rules would begin but Shulman said it wouldn’t be this tax season. The IRS is accepting comments on the proposal until March 29, 2010.
“As we do our best to understand and manage complexity, some joke that we have gone from complexity to perplexity.” – IRS Commissioner Doug Shulman
mortgage interest, state and local taxes, charitable contributions, and miscellaneous deductions. Thankfully, these “phase-out” rules have been getting phased out since 2006, as part of the “Bush tax cuts.”
 
The good news: For 2010, the phase-out rules are gone. The bad news: It’s only a one-year reprieve. The rules are scheduled to reappear in 2011 with sharper teeth as the Bush tax cuts expire.
 
These rules can be complicated to understand so below is a detailed explanation of how they have worked in the past and how they will work over the next couple years — providing Congress does not change them.
 
 
Tax Planning Implications for this Year
 
What could this mean for you? For 2010, if your income is high enough, you can actually write off all of your itemized deductions and personal exemptions.
One significant planning opportunity involves donations to IRS-approved charities, where contributing this year could produce a much bigger tax-saving benefit than if you donate the same amount next year.
   

 

Other Deductions

In addition to charitable donations, you might be able to benefit elsewhere on your tax return. Prepaying your January 2011 house payment in December could allow you to fully deduct some mortgage interest that would not be fully deductible if it is paid next year. You might also be able to benefit more by prepaying miscellaneous expenses such as safe deposit rental costs, tax preparation fees, and other expenditures.
For the same reason, prepaying some 2011 state and local income and property taxes could be helpful. However, if you will be subject to the dreaded alternative minimum tax (AMT) this year, prepaying those taxes may do you little or no good (deductions for those taxes are disallowed under the AMT rules).
Your tax adviser can help you plan ahead to minimize (or eliminate) the AMT.
 
 
Special Rules for Haiti Donations
 
As you may know, taxpayers can receive a special tax break for making charitable donations to qualified organizations providing aid to the victims of the massive earthquake in Haiti.
People who give to qualified charities after January 11 and before March 1, 2010, can claim these donations on their 2009 tax returns. (Only cash contributions made on behalf of Haitian victims are eligible. This includes contributions made by text message, check, credit card or debit card.)
However, if you are going to be hit by the itemized deduction phase-out rules, it would be better not to claim your donation to Haitian victims last year, but to claim it this year.
Keep Additional Limitations in Mind

However, no matter when you take the write-off, beware of other limitations on charitable donations. Many taxpayers don’t know that all charities aren’t created equal. You donate to “50 percent charities,” which include religious groups, schools, hospitals, and public charities. There are also “30 percent charities,” such as veterans’ organizations, domestic fraternal societies and some private foundations.
Donations of cash are generally limited to 50 percent of AGI, but there are several exceptions (both favorable and unfavorable) to this general rule.

Although the IRS calls them 50 percent charities, you can deduct only as much as 30 percent of your AGI in the year of the gift when you contribute appreciated securities. If your AGI is $100,000 and you give $40,000 in stock to your alma mater, you can only deduct $30,000. The remaining $10,000 must be carried forward to another year.

With a 30 percent charity, you can give as much as 30 percent of your AGI in cash, but only 20 percent in appreciated assets.

Consult your tax adviser if you want more information about planning for tax-smart charitable donations.
Below is a detailed rundown of how the phase-out rules have been applied in recent years, as well as how they will work in 2010 and 2011.
  Phase-Out Rules Yesterday, Today and Tomorrow
Itemized Deduction
Phase-Outs		 Personal Exemption
Phase-Outs
Before 2006 Itemized deductions (mortgage interest, state/ local taxes, charitable donations, and miscellaneous expenses) were reduced by 3 percent of excess AGI.*
Before 2006, the maximum phase-out was limited to 80 percent of the affected deductions. For example, if your 2005 deductions for mortgage interest, taxes, charitable donations, and miscellaneous expenses were $40,000, the most you could lose under the phase-out rule was $32,000 (80 percent times $40,000). So if your income was at the top of the phase-out range, your deductions were cut to $8,000.		 Write-offs for personal exemptions were reduced by 3 percent of excess AGI.
Before 2006, the phase-out rule could wipe out all personal exemption deductions if your AGI was high enough.
For example, let’s say you were a married joint filer in 2005 with four exemptions totaling $12,800 (each exemption was $3,200). If your AGI exceeded $341,450 (the top of the income phase-out range that year), your exemptions were completely eliminated.
2006 and 2007 Itemized deductions were reduced by 2 percent of excess AGI (versus 3 percent before 2006), and the maximum phase-out amount was limited to 53.33 percent of affected deductions. The personal exemption phase-out amount was cut back by one-third. Therefore, if your AGI was high enough, you could lose up to two-thirds of your otherwise allowable personal exemptions.
2008 and 2009 Itemized deductions were reduced by 1 percent of excess AGI (compared to 2 percent in 2006 and 2007), and the maximum phase-out amount was limited to 26.67 percent of affected deductions.
For 2009, the phase-out began with an AGI of $166,800 for single taxpayers, joint filers and heads of household		 The personal exemption phase-out amount was cut back by two-thirds. So you could lose up to one-third of otherwise allowable personal exemptions if your income was high enough.
For 2009, the phase-out began with an AGI of $166,800 for single taxpayers, $250,200 for joint filers and $208,500 for heads of household.
2010 The itemized deduction phase-out rules are gone. For 2010, if your deductions for mortgage interest, state and local taxes, charitable donations, and miscellaneous deductions total $40,000, you can actually write off the full $40,000. The personal exemption phase-out rules have been eliminated for 2010. You’ll be allowed to deduct all your rightful exemptions ($3,650 each) on this year’s return, even if you have a high income.
2011 The phase-out rules are scheduled to come back with full force. In other words, they will work the same way they did before 2006. So if your 2011 deductions for mortgage interest, taxes, charitable contributions, and miscellaneous expenses are $40,000, the most you could lose will be $32,000. It will be back to the bad old days.
The official phase-out amounts for 2011 won’t be out until close to the end of this year, but we estimate they will begin with an AGI of about $168,000 for singles, joint filers and heads of household.		 Phase-outs are scheduled to return and operate the way they did before 2006. So if you have four personal exemptions totaling about $14,800 next year (based on a guess-timate of $3,700 for each exemption), you’ll lose them all if you file jointly with an AGI of more than about $375,000. We’ll be back to unfavorable old rules.
The official phase-out AGI amounts won’t be out for months but we guess-timate they will begin at about $168,000 for single taxpayers, $252,000 for joint filers and $210,000 for household heads.

* Excess AGI was equal to the AGI shown on the last line of page 1 of your Form 1040 minus an inflation-adjusted threshold that changed each year.
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