Seven Tax-saving Year-end Tax Planning Ideas for Individuals

NEW YORK — Despite confusion created by recent and probable year-end tax legislation changes, the 2010 federal income tax environment is still quite favorable, noted Robin Christian, senior tax analyst for the Tax & Accounting Business of Thomson Reuters. “However, we may not be able to say that after 2010, therefore, tax planning actions taken between now and year-end may be more important than ever. Be careful though—Congress could change the ball game before the end of the year.”

Following are seven planning ideas to consider while there is still time to act before the end of the year.

1. Accelerate Itemized Deductions into this Year. If your Adjusted Gross Income (AGI) will be more than $170,000 ($85,000 if you are married and file separately) next year, you may want to accelerate into 2010 your state and local tax payments that are due early next year. You may also want to prepay in 2010 some charitable donations that you would normally make in 2011. Why? Because for 2010, the phase-out rule that previously reduced write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) is gone, but is scheduled to come back in 2011, unless Congress takes action to prevent it, which looks increasingly unlikely.

If the phase-out rule comes back as expected, it will wipe out $3 of affected itemized deductions for every $100 of AGI above the applicable threshold. For 2011, the AGI threshold will probably be around $170,000, or about $85,000 for married individuals who file separate returns. Individuals with very high AGI may have up to 80% of their affected deductions wiped out.

2. Think Twice Before Deferring Income into 2011. This strategy makes sense if you are confident you will be in the same or lower tax bracket next year, but the tax picture for 2011 is blurry. With just weeks left in 2010, the fate of many tax provisions for 2011 and beyond is still unknown. The top two rates have widely been expected to increase in 2011 from the current 33% and 35% to 36% and 39.6%, respectively—at least for taxpayers earning $250,000 or more ($200,000 or more if single). Therefore, if you fall into this group, you might want to consider reversing the traditional strategy and accelerating income into 2010 to take advantage of this year’s presumably lower rates. However, legislators could still vote to delay any tax increase to after 2011. "It may be wise to start now to identify ways you could accelerate some of your 2011 income into 2010, but wait to pull the trigger on them until later in the year when, hopefully, we will know more,” said Christian.

3. Time Your Investment Gains and Losses and Consider Being Bold. As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year instead of next year. The maximum federal income tax rate on long-term capital gains from 2010 sales is 15%. However, that low rate only applies to gains from securities that have been held for at least a year and a day. In 2011, the maximum rate on long-term capital gains is scheduled to increase to 20%. That will happen automatically unless Congress takes action, which currently seems unlikely.

To the extent you have capital losses from earlier this year or a capital loss carryover from pre-2010 years (most likely from the 2008 stock market meltdown), selling appreciated securities this year will be tax-free because the losses will shelter your gains. Using capital losses to shelter short-term capital gains is especially helpful because short-term gains will be taxed at your regular rate (which could be as high as 35%) if they are left unsheltered.