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As the clock strikes midnight on December 31 and 2011 is welcomed in, the door of opportunity closes on the steps that you can take in order to minimize your tax burden for 2010.
Tax planning this year is somewhat more challenging because of the uncertainty in knowing what the tax rates will be for 2011 and beyond. According to the schedule, certain tax benefits were granted in 2000 and are scheduled to be eliminated at the end of 2010. Most people and politicians are hoping that they won't be.
Assuming that nothing is done, everyone's taxes will rise by three to five percent and the child tax credit will be reduced by 50 percent next year. Clearly it may be to your advantage to accelerate income in 2010 and defer deductible expenses until 2011, which means that we need to determine if we would be better off reducing this year's tax bill or next year's, realizing that the steps will be different.
If you are a salaried worker there is little that you can do with regard to the timing of your income. If you are self employed you may be able to accelerate receipt of your income prior to January 1. This requires the cooperation of those who owe you money and they may be looking to defer their expenses until 2011, so don't count on this strategy working.
If you are taking money from an IRA in excess of the Required Minimum Distribution you may wish to take out more this year and less in 2011. You should consider this only after either discussing it with a tax professional because of the impact that it may have this year on the taxability of your social security benefits if you are a recipient.
If you have property taxes payable in January and you normally pay them in December you may consider postponing them until next year. If they are due in December the penalty for a late payment might be greater than any tax savings.
If you are considering gifting to charity in 2010 you might want to defer that until 2011, when a deduction may be worth more.
There are a host of expenses that fall into the miscellaneous deductions category and are subject to the two percent threshold, which means that only the amount of the expenses in excess of two percent of your Adjusted Gross Income (line 33) count. If your AGI is $100,000 then only the expenses above $2,000 are counted. People who fall short in this category often prepay two years worth of expenses so that they can get a deduction in at least one year. Membership dues, magazine subscriptions, safe deposit box rentals are examples.
Make sure that you are taking advantage of any retirement plan contributions available through payroll deduction. It may be too late to change anything but if you are looking to reduce this year's income then speak with your HR department about bumping up that last 401k contribution.
The Capital Gains tax rate is scheduled to rise next year, from 15 percent to 20 percent, so you may want to consider selling some winners and recognizing the gains now. When you are recognizing a gain you do not need to be fearful of the wash sale rule, which applies to losses on securities sold and bought within a 61-day window.
When you sell a security at a loss you may be able to offset some of the loss against ordinary income. You offset capital losses against capital gains and then are allowed to deduct $3,000 against ordinary income. You can carry forward the losses until they are exhausted and if rates rise next year then the tax value of the losses increases.
Your own tax situation is unique and not only requires but deserves some personal attention. If you follow the few steps listed here you may be better off however you might also wind up being subject to the awful and dreaded Alternative Minimum Tax which is another matter altogether. I am certain that when Robert Burns wrote "the best laid schemes of mice and men often go astray," he had taxes in mind.
- Investing Education