DiMaggio & Robinson, Ltd Certified Public Accountants & Business Consultants 216 West Jackson Blvd., Suite 330 Chicago, IL 60606-6995
• Phone (312)658-1000 ● Fax (312) 658-1222 Web Location: www.drcpa.biz
The midterm elections have changed the Congressional landscape, with Republicans
winning control of the House of Representatives and picking up seats in the Senate. Even
so, it's still too early to know exactly how this will affect open tax issues for 2010 and
Specifically, when the “lame-duck” Congress returns this month, it must decide whether
to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts,
and allow personal credits to offset the AMT), as it has done in past years. It also must
decide whether to retroactively extend a number of tax provisions that expired at the end
of 2009. These include, for example, the research credit for businesses, the election to
take an itemized deduction for State and local general sales taxes in lieu of the itemized
deduction permitted for State and local income taxes, and the additional standard
deduction for State and local real property taxes.
In addition, Congress must decide whether to extend the Bush tax cuts for some or all
taxpayers. They and other Bush-era tax rules expire at the end of this year. Without
Congressional action, individuals will face higher tax rates on their income, including
capital gains. Also, unless Congress changes the rules, the estate tax, which isn't in effect
this year, will return next year with a 55% top rate.
In short, year-end planning—which always involves some educated guesswork—is a
bigger challenge this year than in past years.
That said, we have compiled a checklist of actions that can help you save tax dollars if
you act before year-end. These moves may benefit you regardless of what the lame-duck
Congress does on the major tax questions of the day. Not all actions will apply in your
particular situation, but you will likely benefit from many of them. We can narrow down
the specific actions that you can take once we meet with you to tailor a particular plan. In
the meantime, please review the following list and contact us at your earliest
convenience so that we can advise you on which tax-saving moves to make.
Year End Moves for Individuals
•Increase the amount you set aside for next year in your employer's health flexible
spending account (FSA) if you set aside too little for this year. Don't forget that you
cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs,
such as aspirin and antacids (2010 is the last year that FSAs can be used for
•Realize losses on stock while substantially preserving your investment position. There
are several ways this can be done. For example, you can sell the original holding, then
buy back the same securities at least 31 days later. It may be advisable for us to meet to
discuss year-end trades you should consider making.
•Increase your withholding if you are facing a penalty for underpayment of federal
estimated tax. Doing so may reduce or eliminate the penalty.
•Take an eligible rollover distribution from a qualified retirement plan before the end of
2010 if your are facing a penalty for underpayment of estimated tax and the increased
withholding option is unavailable or won't sufficiently address the problem. Income tax
will be withheld from the distribution and will be applied toward the taxes owed for 2010.
You can then timely roll over the gross amount of the distribution, as increased by the
amount of withheld tax, to a traditional IRA. No part of the distribution will be includible
in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax
year to reduce previous underpayments of estimated tax.
•Make energy saving improvements to your main home, such as putting in extra
insulation or installing energy saving windows or buying and installing an energy efficient
furnace, and qualify for a 30% tax credit. The total (aggregate) credit for energy efficient
improvements to the home in 2009 and 2010 is $1,500. Unless Congress acts, this tax
break won't be around after this year. Additionally, substantial tax credits are available
for installing energy generating equipment (such as solar electric panels or solar hot
water heaters) to your home (this break stays on the books through 2016).
• Convert your traditional IRA into a Roth IRA if doing so is expected to produce better
long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be
tax-free but the conversion will increase your adjusted gross income for 2010. However,
you will have the choice of when to pay the tax on the conversion. You can either (1) pay
the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax
on the conversion when you file your 2011 return in 2012, and the other half when you
• Purchase qualified small business stock (QSBS) before the end of this year. There is no
tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010
and before January 1, 2011, and (2) held for more than five years. In addition, such
sales won't cause AMT preference problems. To qualify for these breaks, the stock must
be issued by a regular (C) corporation with total gross assets of $50 million or less, and a
number of other technical requirements must be met. Our office can fill you in on the
Take required minimum distributions (RMD) from your IRA or 401(k) plan (or other
employer-sponsored retired plan) if you have reached age 70 1/2. Failure to take a
required withdrawal can result in a penalty of 50% of the amount not withdrawn. A
temporary tax law change waived the RMD requirement for 2009 only, but the usual
withdrawal rules apply full force for 2010. So individuals age 70 1/2 or older generally
must take the required distribution amount out of their retirement account before the end
of 2010 to avoid the penalty. If you turned age 70 1/2 in 2010, you can delay the
required distribution to 2011, but if you do, you will have to take a double distribution in
2011—the amount required for 2010 plus the amount required for 2011. Think twice
before delaying 2010 distributions to 2011—bunching income into 2011 might push you
into a higher tax bracket or have a detrimental impact on various income tax deductions
that are reduced at higher income levels.
•Make annual exclusion gifts before year end to save gift tax (and estate tax if it is
reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals
free of gift tax. However, you can't carry over unused exclusions from one year to the
next. The transfers also may same family income taxes where income-earning property is
given to family members in lower income tax brackets who are not subject to the kiddie
Year End Moves for Business Owners
•Hire a worker who has been unemployed for at least 60 days before year end if you are
thinking of adding to payroll soon. Your business will be exempt from paying the
employer's 6.2% share of the Social Security payroll tax on the formerly unemployed
new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire
on the payroll for a continuous 52 weeks, your business will be eligible for a
nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This
credit will be taken on the business's 2011 tax return. In order to be eligible, the formerly
unemployed new-hire's pay in the second 26-week period must be at least 80% of the
Put new business equipment and machinery in service before year-end to qualify for 50%
bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation
allowance won't be available for property placed in service after 2010.
Make expenses qualifying for the $500,000 business property expensing option. The
maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the
cost of qualifying property placed in service for that tax year. The $500,000 amount is
reduced by the amount by which the cost of qualifying property placed in service during
2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can
expense up to $250,000 of qualified real property (certain qualifying leasehold
improvements, restaurant property, and retail improvements). Note that at tax return
time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This
is something to consider if tax rates go up for 2011 and future years, and you'd rather
have more deductions after 2010 than for 2010.
•Set up a self-employed retirement plan if you are self-employed and haven't done so
•Increase your basis in a partnership or S corporation if doing so will enable you to
deduct a loss from it for this year. A partner's share of partnership losses is deductible
only to the extent of his partnership basis as of the end of the partnership year in which
the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S
corporation's losses only to the extent of the total of his basis in (a) his S corporation
stock, and (b) debt owed to him by the S corporation.
•Consider whether to defer cancellation of debt (COD) income from the reacquisition of
an applicable debt instrument in 2010. The business can elect to elect to have the COD
income included in gross income ratably over five tax years beginning with the fourth tax
year following the tax year in which the repurchase occurs (i.e., beginning with 2014).
These are just some of the year-end steps that can be taken to save taxes. Again, by
contacting us, we can tailor a particular plan that will work best for you.
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