Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.
Although it is generally beneficial for taxpayers to defer income and accelerate expenses, tax reform may be on the horizon. Therefore, the focus of tax planning for 2010 shifts to balancing tax rates for the current and future years. Because the Obama administration has proposed an increase in the income and capital gains tax rates for individuals effective for 2011, the traditional year-end planning strategy of deferring income into next year may not work well for 2010. You are more likely to benefit by accelerating your 2011 income into 2010 to escape higher rates.
To further complicate matters, individual marginal income tax rate reductions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) are set to expire at the end of 2010. If EGTRRA sunsets without modification by Congress, the temporary 10 percent regular income tax bracket will be eliminated, and the 33 and 35 percent brackets will be increased to 36 and 39.6 percent, respectively.
In addition to the possible changes in tax rates, tax planning is adversely affected by the status of extensions on tax breaks that expired at the end of 2009. It is anticipated that Congress will extend some or all of these provisions before year-end, but the uncertainty surrounding these incentives impedes the decision-making process:
- Additional standard deduction for state and local real property taxes
- Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
- Motor vehicle sales tax deduction
- Above-the-line deduction for certain out-of-pocket classroom expenses
- Above-the-line higher education tuition deduction
- Moratorium on required minimum distributions
- Nonrefundable tax credit offset of entire regular and AMT tax liability
- Tax-free IRA distributions to charity
- AMT exemption amounts for individuals are scheduled to revert back to the amounts that applied prior to the 2001 tax year
Higher-income taxpayers have a further complication to tax planning. They generally must reduce their otherwise allowable itemized deductions if their adjusted gross income exceeds a specified threshold amount. In 2010, the phase-out of itemized deductions for higher-income taxpayers is eliminated. However, the alternative minimum tax (AMT) continues to negate personal exemptions and many itemized deductions. For this reason, a failure to take the AMT into account could jeopardize your tax-planning strategy.
Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at 724-654-8970 to make an appointment to discuss your tax planning options.
