Federal tax law provides many opportunities
for taxpayers to cut their tax bills — regardless of what time
of the year it may be. Late summer may not seem like the season
to think about taxes to many people. However, midyear is an
ideal season to assess your tax situation and identify and
implement appropriate planning strategies.
Develop a Plan
Don’t wait until the last minute to get
ready for your 2010 federal income-tax bill. Planning ahead is
especially important if you expect to earn more income this year
than last year. It’s smart to prepare a taxable income
projection for the year, including the income you expect to
receive through the remainder of 2010 and the tax deductions
that you may be entitled to claim. Once your taxable income for
2010 is projected, an estimate of your 2010 tax bill can be
calculated using the current tax rate schedule.
Avoid Estimated Payment Penalties
Generally, your total payments in tax
withholding from your paycheck and estimated tax payments you
send to the IRS over the course of the year should be at least
90% of your 2010 federal tax liability.
Alternatively, you can base your payments on the taxes you paid
for 2009. If your adjusted gross income (AGI) in 2009 was
$150,000 or less ($75,000 or less for married persons filing
separate returns), the alternate required 2010 payment is 100%
of your 2009 tax liability.
If your 2009 AGI was over $150,000
($75,000), the alternate required payment for 2010 is 110% of
your 2009 tax. If you fail to meet the payment rules, the IRS
may charge you interest and penalties, unless the final tax owed
on your tax return is less than $1,000.
If you receive significant
income from sources other than your job, or if you are
self-employed, you may be required to make quarterly estimated
tax payments directly to the government.
Adjust Withholding on Form W-4
If you are employed, check one of your
recent pay stubs to see if your tax withholdings are putting you
well on your way to paying your 2010 tax. If too much or too
little is being withheld from your pay, ask your employer’s
payroll department for Form W-4 and complete it right away. The
sooner you submit a new W-4, the more accurate your withholding
is likely to be.
If you expect to itemize your deductions on
your 2010 return, think about paying deductible expenses before
the end of the year to lower your 2010 taxes.
Deductible Interest. Consider making
your January 2011 mortgage payment (which includes December’s
interest) in late December 2010, so that the interest will be
deductible on your 2010 return.
Medical and Miscellaneous Itemized
Expenses. Your deductions are limited to the amounts that
exceed 7.5% of AGI for medical expenses and 2% of AGI for
miscellaneous expenses. Bunching two years of your or your
family’s unreimbursed medical or miscellaneous itemized expenses
(such as certain job-related expenses and investment expenses)
into one tax year may allow you to surpass the deduction floors
and help you gain a deduction for part of your expenses.
Charitable Contributions. If you are
planning to make a charitable donation in early 2011, consider a
2010 year-end donation instead. Contributions charged on your
credit card in 2010 count as 2010 deductions, even if you don’t
receive or pay the credit card bill until 2011.
Taxes. If you pay quarterly
estimated state income taxes, consider paying your last 2010
estimate before December 31, so that it will be deductible on
this year’s tax return. Employees who have state income taxes
withheld from their pay may wish to increase the amount withheld
from their remaining 2010 paychecks to cover any projected
However, if you expect to be in a much
higher tax bracket in 2011, accelerating deductions into 2010
may not be your best course of action. In addition, if you claim
high deductions in 2010, you may be
subject to the alternative minimum tax. See us for more details.
Retirement Savings Plan.
If you are contributing to a retirement
plan at work, such as a 401(k) plan or 403(b) tax sheltered
annuity, try to take full advantage of the tax benefits offered.
The money you contribute in 2010 is not included in your taxable
income for the year so, not only does contributing to your plan
allow you to reduce the income tax you currently pay, but it
also lets you save on a tax-deferred basis. In any event, try to
make enough of a contribution to secure the maximum employer
If you have a traditional IRA or Roth IRA,
you have until April 16, 2011, to make a contribution of up to
$5,000 to your account for 2010, or up to $6,000 if you’re age
50 or older. Check with us for eligibility requirements and
other important tax considerations.
Self-employed business owners who do not
already have a tax-deferred retirement plan should consider
starting one before year-end. Options to examine include a
so-called “solo 401(k)” plan, a Simplified Employee Pension
(SEP) plan, or a SIMPLE plan. We would be happy to discuss the
advantages and restrictions of each type.
Can We Help?
We’re ready to provide you with personal
and business year-end tax planning assistance. Call us for an
appointment to review your specific situation.