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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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…)
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
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.
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.