TAX PLANNING TIPS TO THINK ABOUT BEFORE THE END OF 2010
Glenn Bailey, CPA
After looking back over all the legislative changes in the past couple years I compiled a list of a few things that are worth thinking about before the end of 2010:
In 2011 Flexible Spending Accounts no longer allow for reimbursement of over the counter (non-prescription) drugs, so if you have money left in yours you can stock up on these items prior to year end.
The Energy credit for purchasing and installing energy saving materials, including insulation, certain windows & doors or energy efficient heating and A/C systems expires 12/31/10. This is a 30% credit for the cost of eligible items purchased for your primary residence, up to a maximum of $1500. The maximum applies to total eligible costs in 2008 & 2009, so if you already spent your $5000 and received the full credit, you can’t get it again. If you haven’t yet received the full credit, take a look around the house for things that might need replacing soon and see if you can take advantage of the free money.
If you are interested in converting your traditional IRA to a Roth, a conversion in 2010 will give you the option of spreading the tax over two years: 2011 & 2012, or paying it all in 2010. You don’t have to decide until April 15, 2011, so you will have time to see what happens with tax rates and the stock market. Remember you can re-characterize your conversion to the Roth (undo the conversion and put things back the way they were originally) with no penalty prior to the extended due date of your return, October 15th if you file an extension, if your investments decline in value after the conversion.
Required minimum distributions are again necessary from IRAs and pension plans after the waiver in 2009. If you are over 70 ½ verify that you have taken your distribution.
If you have assets that you are interested in transferring to others, make gifts under the annual exclusion amounts of $13,000 per person well before year end. We regularly see people who waited until the last minute and the gifts fail to transfer on time, resulting in the loss of their annual exclusion gift for that year. If you make regular gifts or are planning to make significant gifts this year, make the transfers early in the year to avoid problems in the year-end crunch.
If you claimed the original first time homebuyer credit in 2008, this credit must be repaid over 15 years. Your first repayment is due with your 2010 tax return. Be sure that your withholding or estimated payments are sufficient to cover this increase in your tax to avoid a penalty or nasty balance due surprise. The 2nd version of this credit does not need to be paid back. Make sure you know which one you received. The repayable one was for homes purchased during 2008. The 2nd version was for homes purchased starting January 1, 2009, but did allow you to claim the credit on your 2008 tax return.
Watch the news for updates on the tax rate changes under consideration for 2011. If rates go up it might be wise to accelerate income and delay deductions, the opposite of traditional tax planning.