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.

 Itemized Deductions

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 underpayment. 

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 matching contribution. 

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.