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

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:

IRS: http://www.irs.gov/businesses/small/article/0,,id=180547,00.html?portlet=7

FEMA: http://www.fema.gov/pdf/library/pfd.pdf

Harvard Health: http://www.health.harvard.edu/downloads/preparing_for_disaster.pdf

Ready America: http://www.ready.gov/america/getakit/

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:

IRS Rollover Chart

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: https://locator.aarp.org/vmis/sites/tax_aide_locator.jsp

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 IRS.gov.

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.

Will it matter where you retire?

Did you realize that states treat social security or pension income differently?

Check out this site by Kiplinger for a list of the states that are much more tax friendly for retirees:
http://www.kiplinger.com/tools/retiree_map/index.html?map=12#anchor

2009 Tax Preparation Checklist

Need help gathering your tax documents? Check out our list to make sure you don't miss anything!

http://www.evergreenfinancialplanning.org/Evergreen_Financial_Planning/Client_Forms_files/Test%20Preparation%20Checklist.pdf

Year End Tax Tips

Get Organized -
If you haven't done it already, start a file for your tax documents. As you receive W-2s, 1099s , 1099bs and 1098s, you will have a place to file them. Do you have kids in college or in child care? Do you have medical bills? Have you kept your receipts for charitable donations? If the donations were non-cash do you have a detailed list attached to your receipt? Are you keeping track of mileage for charitable work or miles driven to medical appointments? For a complete list of items see Tax Preparation Checklist on the Client Forms page of our website www.EvergreenPlanning.org.

Adjustments to state withholding -
If you expect to owe state income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes. This can be done by filing Form G-4, Georgia Employee's Withholding Allowance Certificate.
If you are self-employed or retired and are making quarterly estimated tax payments, be sure to pay the State fourth quarter estimated tax payments before year-end to pull the deduction of those taxes into 2009.

Adjustments to federal withholding -
If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person.
If not enough tax or too much tax is being withheld, you should give your employer a new Form W-4, IRS Employee's Withholding Allowance Certificate.
If you are receiving a pension, withholding can also be adjusted by sending Form W4-P, Withholding Certificate for Pension or Annuity Payments, to your pension payer.

Year End Tax Tips for Employees

Employees have some special considerations to take into account that retirees and other nonworking individuals don't face. To help our clients who are employees take advantage of these special tax saving opportunities, we have put together a list of items to consider. Please review the list and contact us if you need additional information on one or more of the items.

Health flexible spending accounts -
Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer's health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible.
If you have set aside funds in your employer's health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don't forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.
Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don't forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs -
Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit.
However, like health FSAs, dependent care FSAs are subject to the use-it-or lose it rule. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

401(k) contributions -
Review and make appropriate adjustments to your contributions to you employer's 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.

Six Recovery Tax Incentives for Individuals

The American Recovery and Reinvestment Act provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient, and parents and students paying for college.

Here are six things the IRS wants you to know about ARRA tax incentives for individuals:

1. First-Time Homebuyer Credit Taxpayers who haven’t owned a principal residence during the past three years prior to the purchase date of a home before Dec. 1 of this year may be eligible to receive a credit of up to $8,000 on an original or amended 2008 tax return. They can also wait and claim the credit on their 2009 return.
2. New Vehicle Purchase Incentive Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels.
3. Making Work Pay and Withholding The Making Work Pay Credit lowered employees’ tax withholding rates this year and has already put more money into the pockets of wage earners. Self-employed individuals will have an opportunity to claim this credit when they file their 2009 return. Taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is currently being withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers, workers without a valid social security number, some social security recipients who work and pensioners. Failure to adjust your withholding in these situations could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year.
4. Tax Credit for First Four Years of College The American Opportunity Credit can help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
5. Certain Computer Technology Purchases Allowed for 529 Plans ARRA adds computer technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
6. Energy-Efficient Home Improvements The credit for nonbusiness energy-efficient improvements is increased for homeowners who make qualified improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery.

or http://www.EvergreenPlanning.org

What you need to know about the New Sales Tax Deduction for Vehicle Purchases

From the IRS

Taxpayers who buy a new car or several other types of motor vehicles this year may be entitled to a special tax deduction when they file their 2009 federal tax returns next year. The tax break is part of the American Recovery and Reinvestment Act of 2009.

Here are seven things you should know about this new deduction:

1. State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible.
2. Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.
3. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
4. This is an above-the-line deduction and can be taken regardless of whether or not you itemize other deductions on your tax return.
5. Taxpayers will claim this deduction when filing their 2009 federal income tax return next year.
6. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
7. The deduction may not be taken on 2008 tax returns.
   Consumers who are considering buying a new car may find that this tax incentive means there has never have been a better time to buy.

Five Tips To Avoid Tax Time Stress

For help with your Tax Return Preparation or Tax Planning, call Teri at 678-763-1372

IRS Tax Tip 2009-50

Are you looking for ways to avoid the last-minute rush for doing your taxes?  Here are some stress-relieving tips to help you.

1. Don't Procrastinate - Resist the temptation to put off your taxes until the very last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

2. Visit the IRS Online - In 2008, there were more than 330 million visits to IRS.gov.  Anyone with internet access can find tax law information and answers to frequently asked tax. questions.

3. File your Return Electronically - Nearly 90 million taxpayers filed their returns electronically in 2008.  Aside fro the ease of filing, IRS e-file is the fastest and most accurate way to file a tax return.  If you are due a refund, the waiting time for e-filers is half that of paper filers.  

4. Don't Panic if You Can't Pay - If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest.  You also should contact the IRS to discuss your payment options at 1-800-929-1040.  The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise.  More than 75% of taxpayers eligible for an Installment Agreement can apply using the Web-based Online Payment Agreement application available on IRS.gov.  To find out more about this simple and convenient process type "online Payment Agreement" in the search box on the IRS.gov homepage.

5. Request an Extension of Time to File - But Pay on Time - You can get an automatic six month extension to file to October 15, 2009.  However, this extension of time to file does not give ou more time to pay any taxes due.  You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90% of your total tax by that date.  See IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Tax Return for a variety of easy ways to apply for an extension.  Form 4868 is available at IRS.gov or by calling 1-800-TAX-FORM (800-829-3676).  Taxpayers needing a Form 4868 should act soon to be sure they have the item in time to meet the April deadline.

Additional Standard Deduction for Real Estate Taxes

Do you pay state or local real estate taxes but don't qualify to itemize your deductions?  

For Tax Years 2008 and 2009, if you pay state or local real estate taxes, you may take an addition to the standard deduction.  

What you need to know about the additional standard deduction for real estate taxes:

1. The additional deduction is equal to the amount of of real estate taxes 

paid up to $5oo for single filers or $1000 for joint filers.

2. You must have paid the taxes during your tax year and the taxes must 

have been imposed on you.

3. The taxes must be based on the assessed value of the property.  Taxes 

imposed for improvements to property, such as assessments for 

sidewalks, usually cannot be deducted.

4. Real Estate taxes paid on business or foreign property do not qualify.

5. You must file Form 1040 or 1040A to claim the additional deduction.

Form 1040 - check box on line 39c

Form 1040A - check box on line 23c