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Year end tax planning (12/08/2010)
by Richard Schneider

Emeritus Professor of Accounting

Well here it is December and just a few weeks remaining to do some things to lessen the income tax for 2010, or 2010 and 2011 combined. At this point it appears the Bush tax cuts will be continued for the next several years. While this will be costly to the federal deficit, it will mean that you won’t need to shift income to 2010 for fear of higher tax rates in 2011.

If you itemize, you can shift certain deductions to the year of greatest tax benefit. For the first time in many years Mary and I can not itemize, but will be able to itemize in 2011. Our tactic is to defer the giving of charitable contributions until January, make any state estimated tax payment in January, not December. If we have some outstanding medical bills, we would also defer payment until 2011. The point is to shift the deductions to the tax year that saves the most in income tax.

If you have a small business reported as part of your personal return on schedule C, or, a partnership, LLC, LLP, or sub chapter S Corp, you can reduce taxable income by purchasing supplies, and/or equipment subject to section 179 expensing. For most small businesses that are cash basis, the timing of paying the bills determines in which year the deduction is taken. You can also defer income by agreeing at the time of sale that the customer pay you in 2011 not 2010. Be careful here, $1 in hand may be worth $2 in accounts receivable.

If you have a child in college, consider paying some or all of the second semester tuition in 2010, to take advantage of the American Opportunity education credit. There are income limitations; about $80,000 for singles and $160,000 for married filing jointly. The credit is up to $2,500 per year per student for the first four years of qualified higher education.

Consider contributions to IRAs, or HSAs (health saving accounts) for which you qualify. These contributions may well reduce income as an adjustment on your return and some contributions may be made up to April 15th of 2011, and still be deductible in 2010.

The IRS web site (IRS.GOV) contains more detailed information on any particular topic. Remember the tax law is complex, and your situation is most likely unique, consult with your tax advisor, so you gain a better understanding of your tax position and a plan that would benefit you the most.  


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