2010 Year End Tax Planning

Written by Christopher G. Schultz, Esq.

INDIVIDUALS

If you plan to retire, become or continue to be unemployed or otherwise expect your personal income to decrease in 2011, then delay income into 2011 or accelerate deductions in 2010. This will allow you the ability to take advantage of certain tax breaks that are available based on your adjusted gross income.

For example, an individual can make a non-deductible Roth IRA contribution of up to $5,000 in 2010, however, the amount of the contribution is phased out as your adjusted gross income increases. Another example is tax deductible contributions to traditional IRAs for those who are active participants in employer sponsored plans. The deductible contributions are phased out at income levels of $89,000 or higher.

The child tax credit is $1,000 for each qualifying child, but is reduced for taxpayers with income over $110,000. The American Opportunity Tax Credit provides a tax credit of up to $2,500 per student, and contributions to a tax exempt Coverdell Education Savings Account are subject to income limitation. By reducing your adjusted income, you enhance the ability to take the full amount of these and other credits.

To decrease your adjusted gross income for 2010, some simple techniques can result in substantial savings. One technique would be to convert taxable income to tax exempt interest by shifting funds in a money market account to a tax exempt fund. This is especially valuable when there is little or no gain on the transfer of the taxable income asset. Another alternative would be to shift funds to US Series EE Bonds or Inflation Index US Series I Savings Bonds. These types of bonds can have the interest reported when the bonds mature or are redeemed and there is no annual interest income to be reported. Another simple technique if you have income generating investments and have personal debt, cash in the income generating investment and use the funds to pay off the debt. This will reduce your adjusted gross income and may even increase your cash flow if the interest payments on the debt are greater than the income earned on the investment. Increase contributions to retirement plans such as 401(k) Plans. Pay interest or additional interest on student loans, even if the student loan is not yet in repayment status or is in deferment status but is continuing to accrue interest.

BUSINESS

Year end planning for small and medium size businesses is also tax effective. Some tax credits and other tax opportunities are reduced or eliminated each year. For the year 2010, there are some tax saving opportunities.

If you hire a worker who has been unemployed at least 60 days, the business will not have to pay the employer’s share of the social security payroll tax for the remainder of 2010. Additionally if you keep the employee on your payroll for 52 continuous weeks, the employer is eligible for a non refundable tax credit of up to $1,000.

New business equipment and machinery placed into service in 2010 is eligible for the 50% bonus first year depreciation allowance. This allowance expires after 2010.

The amount that can be expensed as Section 179 property placed into service in 2010 is increased to $500,000. Section 179 Property includes:

First year depreciation deduction for autos and trucks placed into service in 2010 is increased by $8,000, in addition to the allowable depreciation on the vehicle.

Business start up expenses are deductible up to $5,000. For 2010 the deduction for start-up expenditures is increased to $10,000.

For self-employed individuals in 2010, the income tax deduction for the cost of health insurance allowed for the self-employed individual, their spouse, dependants and children who have not reached age 27 by the end of the year, is now allowed as an expense in calculating self-employment tax.

CMDA is devoted to helping our individual and business clients develop and grow in their markets. We offer a wealth of experience in many business matters, including decisions on how start up the business, the issue that arise between owners, real estate and asset acquisition, banking and financing, business transactions, buy outs and succession planning.

If you have any questions regarding the tax changes that will occur in 2011, please contact one of our highly-skilled attorneys.