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Is your tax season over? NO!! (04/25/2010)

by Richard Schneider

Emeritus professor of accounting

April 15th has come and gone. When I had my tax practice it meant the end of work days starting at 4am and ending at 10pm. For those taxpayers that wait until the dead line to file, it is a burden lifted as the return is sent off late April 15th, with high hopes they will not be audited and have the IRS ask for proof for all of those charitable contributions. April 15th should not mean the end of income tax awareness until next spring. Tax planning is a vital activity to avoid unpleasant surprises, and create some pleasant tax savings.

After you have filed, its time to look forward to the new tax year, learning from the lessons of last year, exploring new tax law changes, and/or life changes that may apply to you in the new year and beyond. The Schneiders have some lessons from last year and some changes that will affect our taxes for 2010 and beyond.

For 2009 we had about a $1,100 refund on the federal return, and about $1,200 owed to the state of Minnesota. We did have some energy improvements to our home in 2009, saving about $300 in federal taxes, but saving nothing in Minnesota taxes. We also had a one-time ‘making work pay’ credit on the federal return, with no affect on the Minnesota return. Going forward, this lesson would be: the federal withholding is about right and Minnesota withholding should be increased.

We’ll have some life and income changes coming in 2010 and we need to factor these in also. Our first change will be in income. Last year was the last year of early retirement bonus payments. This means a large drop in income, and because they withheld at the maximum level, also a big decrease in tax withholding. My wife started to receive social security late last year, and will have a full year’s worth in 2010, an increase in income. We are having nothing withheld at this time from social security benefits. We will be drawing from our IRAs this year, and there is no automatic withholding.

Our life changes are centering on housing. Our home is for sale and if luck holds we will be closing early June. Last month we discovered there were several items that needed to be addressed with the home prior to sale, at a cost of several thousand dollars. Sadly none of these improvements or repairs will qualify for the energy credit, so no tax affect that way, but we needed to draw from an IRA to pay for these, and that will increase taxable income and the amount of tax on the 2010 return. We have owned our home for 20+ years, and of course are selling at a price higher than cost, but as a married couple we can exclude up to $500,000 of our gain on sale, our gain will be less than $60,000 and much less if we counted inflation. Thankfully the state of Minnesota has also adopted this gain exclusion.

We will be renting for the rest of 2010, which means the loss of the mortgage interest deduction, and most likely we will be taking the standard deduction. The standard deduction will be increased by $1,000 of property taxes we paid in 2010 on our current home, but this deduction is not allowed on the Minnesota return. The Minnesota return will allow a deduction for charitable contributions in excess of $500, when using the standard deduction on the federal return.

So there we have it, lower income, fewer deductions, no energy credits, and much lower withholding. We are off to see our tax professional to avoid any unpleasant surprises and see if a new tax law will provide a bonus come tax time next year. Our tax professional happens to be me. I need to run the numbers, and review the latest law changes. Our result; we need to increase our withholding or make estimated tax payments, or face a large tax bill and underpayment penalties next spring. We’ll be doing the withholding.

What should you do? Your tax professional may have talked to you at the time of preparation, if not and you are expecting changes this coming year, make an appointment with your tax professional. For those of you that use free software provided on line, you may be able to use one of these, entering the expected 2010 information, careful not to file the return. If you are a taxpayer who qualified for the AARP/TCE volunteer tax preparation program at the senior center, I would be happy to meet with you. This would be an extension of the volunteer tax program with no charge to you. Keep your ear tuned for new tax law changes, and if there appears to be one that will affect you, dig in and find out, or contact your tax professional. Your tax professional may send you periodic tax law updates during the year; review these.

 

 

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