Wednesday, October 13, 2010

Year End Tax Planning: Who should try to reduce AGI for 2010?

From Thomson Reuters RIA Newsstand:

Year-end tax planning: Who should try to reduce AGI for 2010?

Practice Alert

At this time there is a great deal of uncertainty over which income tax rates will apply for 2011. Unless Congress acts, under the EGTRRA sunset rules, virtually everyone will be subject to higher tax rates starting next year, but few expect that this “doomsday scenario” will become reality. Congress may leave the current income tax rate structure unchanged for everyone for 2011, or it may increase tax rates for “higher income individuals.” This uncertain state of affairs leaves many in a quandary about year-end income tax planning moves. This Practice Alert article, continuing a series on year-end planning moves, considers when it would be wise to consider reducing AGI for 2010, for example, by deferring income till next year.

Who should try to reduce AGI for 2010? Numerous tax breaks (tax credits, deductions, and other tax benefits) are reduced or eliminated if a taxpayer's adjusted gross income (AGI), or modified AGI (MAGI), exceeds specified thresholds. As year-end nears, taxpayers who do not anticipatebeing subject to higher rates next year should consider reducing their 2010 AGI by deferring taxable income into 2011, or by accelerating deductions, if doing so will keep their income level for the current tax year below the relevant phase-out thresholds (or will mitigate the effect of the phaseouts). On the other hand, for taxpayers who do anticipate being subject to higher rates next year the best bet might be to take the opposite tack: accelerate as much income as possible from 2011 into 2010, to take advantage of today's rate structure, even if some tax breaks are reduced because of the effect of increased AGI on phase-out thresholds. (Comparative calculations would of course have to be made to see just how much the advantage of lower rates might be offset by the loss of tax breaks.)

The following are the key tax breaks whose availability is limited by AGI (or modified AGI). Some of these tax breaks may themselves be made less available in 2011 as a result of the sunset provisions.

(1) An individual can make a nondeductible Roth IRA contribution of up to $5,000 for 2010 and 2011 (up to $6,000 if he is age 50 or older), reduced by any amount contributed to a traditional IRA. For taxpayers filing joint returns, the otherwise allowable contributions to a Roth IRA phase out ratably for 2010 for MAGI between $167,000 and $177,000 (for 2011, for MAGI between $169,000 and $179,000). For single taxpayers and heads of household it phases out ratably for MAGI between $105,000 and $120,000 for 2010 ($107,000 and $122,000 for 2011). For married taxpayers filing separate returns, for 2010 as well as 2011, the otherwise allowable contribution phases out ratably for MAGI between $0 and $10,000.

(2) For 2010, the AGI phaseout for making deductible contributions to traditional IRAs by taxpayers who are active participants in an employer-sponsored retirement plan begins at $89,000 of MAGI for joint return filers and the deduction is phased out completely at $109,000 of MAGI (for 2011, the phaseout begins at $90,000 and ends at $110,000). For 2010 and 2011, for single taxpayers or heads of household, the phaseout begins at $56,000 of MAGI and is complete at $66,000. For married taxpayers filing separate returns, the otherwise allowable contribution phases out for MAGI between $0 and $10,000 for both 2010 and 2011.

(3) If an individual isn't an active plan participant but his spouse is, the nonparticipant spouse isn't subject to the traditional IRA deduction phaseout range, but can make the full deductible contribution to a traditional IRA in 2010 as long as the couple's combined MAGI doesn't exceed $167,000. The deduction is phased out ratably where the combined MAGI is between $167,000 and $177,000. For 2011, the phaseout begins at $169,000 and ends at $179,000

(4) For 2010, taxpayers are allowed a $1,000 child tax credit for each qualifying child under age 17. The amount of the credit allowable is reduced by $50 for each $1,000 (or part of a $1,000) of MAGI above $110,000 for joint filers, $75,000 for single filers, and $55,000 for marrieds filing separately.

        RIA observation: Pegging the phaseout in $50 increments means that for some taxpayers a $1 increase in AGI (from an increment of $1,000 over the threshold to $1,001 over) can trigger a $50 increase in tax liability (through a corresponding reduction in the credit).

        RIA observation: It will be especially beneficial to defer income to the next year to maximize the amount of the credit available this year if the child will be 17 next year and thus no longer eligible for the credit. Additionally, under an EGTRRA sunset provision that will kick in after 2010 unless Congress acts, the $1,000 limit will fall to $500 and more restrictive rules will apply to the child credit.

(5) For 2010, qualifying taxpayers may claim an American Opportunity Tax Credit of up to $2,500 per student. Also for 2010, there's a Lifetime Learning Credit of up to $2,000 per qualifying taxpayer. The credits are for higher education expenses at accredited post-secondary educational institutions paid by taxpayers for themselves, their spouses and their dependents. For 2010, the American Opportunity Tax Credit is reduced ratably at MAGI between $160,000 to $180,000 on joint returns, and between $80,000 and $90,000 on other returns. For 2010, the Lifetime Learning credit phases out ratably for taxpayers with MAGI of $100,000 to $120,000 on joint returns, and between $50,000 to $60,000 on other returns.

        RIA observation: Under a non-EGTRRA change, the American Opportunity Tax Credit won't apply after 2010, unless Congress changes the rules. Instead, for 2011, eligible taxpayers may claim a Hope credit of up to $1,800 and a Lifetime Learning Credit of up to $2,000. For 2011, both of these education credits will phase out ratably for taxpayers with MAGI of $51,000 to $61,000 ($102,000 to $122,000 for joint filers).

(6) Individuals may take an above-the-line deduction for up to $2,500 of interest on qualified education loans, but, for 2010, the amount otherwise deductible is reduced ratably at MAGI between $120,000 and $150,000 on joint returns, and between $60,000 and $75,000 on other returns. Married taxpayers must file jointly to qualify for the deduction.

        RIA observation: Under the EGTRRA sunset rules, this above-the-line deduction will be around in 2011, but the deduction will phase out over lower MAGI ranges, and some of the qualification rules will be tougher as well.

(7) Taxpayers may contribute up to $2,000 annually to a tax-exempt Coverdell Education Savings Account (CESA) for an individual under age 18 (and special needs beneficiaries of any age). For 2010, contributors who are individuals, the maximum contribution is reduced ratably for MAGI between $190,000 and $220,000 for joint filers, and between $95,000 and $110,000 for others.

        RIA observation: Under the EGTRRA sunset rules, the annual per-beneficiary contribution limit drops to $500, there's a lower phaseout range for marrieds filing jointly, and more restrictive definitional rules apply.

        RIA recommendation: An individual who cannot contribute to a CESA because of the AGI limits (or whose contribution would be limited because of those limits) should consider contributing to a qualified tuition plan (529 plan) instead. There are no AGI limits on contributions to 529 plans. However, distributions of earnings from a 529 plan are tax free only if used to pay for higher education (college and above) expenses while distributions of earnings from a CESA are tax-free if used to pay for elementary and secondary school expenses as well as higher education expenses.

(8) For 2010, the tax-free break for interest on U.S. savings bonds redeemed to pay qualified higher education expenses phases out for joint filers when MAGI exceeds $105,100 and is phased out completely at $135,100; for single taxpayers and heads of household the phaseout begins when MAGI exceeds $70,100 and is complete at $85,100.

(9) The adoption assistance/adoption credit. These breaks begin to phase out for 2010 when MAGI exceeds $182,520 and are gone at $222,520 of MAGI (for 2011, $185,210 to $225,210 for 2011). The total expenses that may be taken as a credit for all tax years for the adoption of a child by the taxpayer is limited to $13,170 for 2010 ($13,360 for 2011). The per-child exclusion for employer-provided adoption assistance also is limited to $13,170 for 2010 ($13,360 for 2011).

(10) A limited amount of nonpassive income can be offset by passive losses from an active participation rental real estate activity. The $25,000 ceiling on this tax break is phased out for adjusted gross income (subject to some special modifications) in excess of $100,000 and completely phased out at AGI of $150,000.

(11) For qualifying purchases of principal residences in the U.S. before Oct. 1, 2010, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $8,000. This credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase.

Other AGI-related tax items: There are other items of income, deduction, credit, and exclusion that are affected by levels of AGI or MAGI. Key items affected are: miscellaneous itemized deductions; Social Security benefits taxation; medical expense deduction; and nonbusiness casualty loss deductions.

      RIA observation: For 2010, neither itemized deductions nor personal exemptions are phased out at higher levels of AGI. However, under the EGTRRA sunsets, for 2011, most itemized deductions of higher-income taxpayers will be reduced by 3% of AGI above an inflation-adjusted figure (but the reduction can't exceed 80%), and a higher-income taxpayer's personal exemptions are phased out when AGI exceeds an inflation-adjusted threshold. If the sunset provisions go into effect, this could be a reason for affected taxpayers to accelerate income to 2010 from 2011.

Other taxpayers who should consider deferring income. Income deferral from 2010 to 2011 also may aid taxpayers in the following situations:

· Retirement, unemployment, or a business slowdown will result in the taxpayer dropping into a lower tax bracket next year.

· Next year a child will escape the kiddie tax and be in a lower bracket than his parents.

· Taxpayer expects to go from single to head-of-household status in 2011. Thus, more of the taxpayer's income will be taxed at a lower rate in 2011 than in 2010.

Source: Federal Tax Updates on Checkpoint Newsstand tab 10/13/2010

Thursday, September 9, 2010

Be Prepared If Disaster Strikes

Are you ready if disaster strikes?

Friends of mine recently lost almost everything they owned in a house fire. Although they were covered by insurance and will have the house rebuilt, they are spending endless hours documenting losses and replacing lost records. With the recent hurricane warnings, wild fires and floods it is good to have your Financial House In Order.

How can you be prepared?
  • Keep a list of important documents and their location.
  • Keep copies of documents and back up electronic files.
  • Keep a list of important contacts and phone numbers
  • Videotape your home to document contents
What documents are important?
  • Estate Planning Documents: Wills, Trusts, Advance Healthcare Directives or Living Will, Power of Attorney for Healthcare, Power of Attorney for Property, DNRs, etc.
  • Insurance Documents: Life Insurance Policies, Accident and Health Insurance Policies, Auto and Property Insurance Policies, etc.
  • Financial Documentation: Tax Returns and supporting documentation, Loan Documents including mortgages, education loans and any other personal loans, Real Estate Deeds, Titles, Investments including Retirement Accounts, Pensions, Savings Bonds, Bank Accounts, Stock Certificates, Brokerage Accounts, Mutual Funds, Stock Options, etc.
  • Other Important Documents: Birth Certificates, Marriage Certificates, Social Security Cards, Divorce Decrees, Death Certificates, Military Discharge Papers, Passports, Family Records, Medical Records, Safe Deposit Box info, etc.
What contacts are important?
  • Family members and friends, Medical - Doctors and Dentists, Financial Advisor, Tax Preparer, Insurance Companies/Agents, Attorneys, Executors

Other Resources to be prepared for disaster:

Harvard Health:
Ready America:

Wednesday, September 8, 2010

NAPFA Consumer Webinar Oct 1st

NAPFA will present the next in it's series of Free Consumer Webinars: Financial Management of an Aging Parent on Friday, October 1st.

Instructor Cheryl Sherrard, AAMS, ATP, CFP®
NAPFA-Registered Financial Advisor

Many Americans are faced with the reality that they will be responsible for managing the financial needs of aging parents. From paying for housing and health care costs to addressing estate planning needs, ensuring that Mom and Dad are taken care of can take a considerable amount of time. This session will address what you can do today to begin planning for their needs tomorrow.

Sign up for "Financial Management of an Aging Parent" on the NAPFA website at

Friday, August 20, 2010

Seven lessons learned from my father's death Robert Powell - MarketWatch

Seven lessons learned from my father's death Robert Powell - MarketWatch

Everyone should read this!

Without a Financial Plan, Women's Long-Term Outlook at Risk

The Great Recession has changed our lives in many ways. One positive result is that it has helped women to become more educated about their finances. A recent study shows that 95% of women are involved in making financial decisions yet most do not have a financial plan in place and many look for help in the wrong places. Good resources to find a Fee-Only Advisor who will be a fiduciary are NAPFA or the Garrett Planning Network.

Read more in Ruthie Ackerman's July 28th article:

Tuesday, March 16, 2010

Retirement Account Rollover Chart

Wondering what retirement accounts you are allowed to roll into another type of retirement account? The following chart has been published by the IRS:

Wednesday, March 10, 2010

Find an AARP Tax-Aide Site Near You!

From February 1 through April 15th each year, the AARP Tax-Aide program offers free one-on-one counselling, as well as assistance on the telephone and internet to help individuals prepare basic tax forms, including the 1040, 1040A, 1040EZ and other standard schedules. For a site near you go to:

Tuesday, March 9, 2010

Did You Receive Economic Recovery Last Year?

The IRS has developed the “Did I Receive an Economic Recovery Payment?” look up tool which gives taxpayers an easy way to determine if they received the one-time ERP payment and which agency made the payment.

Beginning today March 8, 2010, taxpayers can call 866-234-2942 to access the phone application. The Web application will be available in late March on

Taxpayers who had earned income in 2009 or are government retirees and received an Economic Recovery Payment need to report whether or not they received an ERP and the amount when they prepare their Schedule M, Making Work Pay and Government Retiree Credits.

The onetime $250 ERP was paid to individuals in the following categories:

  • Retirees, disabled individuals and Supplemental Security Income (SSI) recipients receiving benefits from the Social Security Administration,
  • Disabled veterans receiving benefits from the U.S. Department of Veterans Affairs, and
  • Railroad Retirement beneficiaries.

Using the IRS look up tool taxpayers will have to enter three pieces of information to determine if they received an ERP:

  • SSN
  • Date of birth
  • Zip code from the last filed return

A separate telephone call or Web inquiry must be made for each taxpayer, even if filing a joint tax return.