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How the Bush Tax Cuts Affect Tax-Saving Strategies
Each November, we like to look at the steps you can take to reduce your tax bill. This year, it's a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.
The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.
Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.
With this in mind, we're looking at year-end measures separately for these two groups: the middle class - those making less than $200,000 for singles / $250,000 for married filers - and the higher income taxpayers - those making more than $200,000 / $250,000.
But first, let's take a quick look at what's at stake.
If All the Bush Tax Cuts Expire...
Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
We don't expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.
We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.
Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.
Minimize Taxes on Investments
Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.
Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?
Don't Defer Income
If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.
For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you're self-employed.
Take Capital Gains Now
Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.
This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.
Let Us Help You
As you can see, this is a complicated year for tax planning. Please don't hesitate to come in and meet with us about your situation. There's still a lot we can do to minimize your tax burden for 2010.
Year-End Tax Planning for Businesses
Businesses can take several measures at the end of the year to reduce their tax burden in 2010. Here's a rundown of best options.
Purchase New Business Equipment
Expensing. The Section 179 deduction for equipment purchases was increased again in 2010 under the recent passage of the Small Business Jobs Act of 2010. Businesses can elect to expense (deduct immediately) the cost of most new equipment up to $500,000 (subject to a dollar-for-dollar reduction in that $500,000 for purchases over $2,000,000).
Further, a business can take bonus depreciation of 50% on the amount of capital expenditures in excess of $2,000,000, and then take normal depreciation on the rest.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here's a simplified explanation:
Conventions. The tax rules for depreciation include "conventions" (rules) for determining how many months of depreciation you can claim. The conventions that come into play with equipment are...
Other Year-End Moves
Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2010 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Retirement Plans. Self-employeds who have not yet done so should set up self-employed retirement plans before the end of 2010.
Dividend Planning. Dividends you cause your corporation to pay qualify for the reduced 15% (or 5%) rate in the hands of stockholders, including you as a stockholder. Such a dividend may reduce the risk of a tax on accumulated corporate earnings.
Budgets. The need for a business budget may seem obvious - but many companies overlook this critical business planning tool. A budget is extremely effective in making sure a business has adequate cash flow and, thus, in ensuring a business's financial success.
That's why every business, from the smallest to the largest, should have a budget. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
For more on this topic, see the article below about common budgeting errors.
Consult Us First
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2010. But be careful about acting on these suggestions without consulting us first. They are general in nature, and your specific tax or financial situation may require special planning.
Small Business Jobs Act - A Look at the Benefits
On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law - a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.
Many of the Act's provisions have already kicked in - which means it's time to learn how they benefit you.
More Loan Money Available
The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.
SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year's attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president's signature.
7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.
The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.
Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans - with better guarantees - are now available at your local bank.
Don't miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.
Tax Cuts, Credits, and Breaks
The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:
Less Red Tape
Some of the Act's benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.
Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.
The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code's definition of "listed property."
What does this mean for the small business owner? It's now much less complicated to deduct the use of your mobile phone on your taxes.
Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.
Do you have questions about how to take advantage of the Jobs Act's provisions? Make an appointment to meet with us. We're eager to help you claim the capital you need for your business.
Avoid Three Common Errors in Budgeting
When it comes to budgeting, it's absolutely essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them. These errors tend to throw budget estimates out of line with reality, thereby taking away from a budget's usefulness.
We can help you set up and maintain a budget. Call our office to discuss.
Income from Foreign Sources
Many U.S. citizens earn money from foreign sources. But not all these taxpayers remember that they have to report all such income on their tax return, unless it is exempt under federal law.
U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).
Foreign source income includes earned and unearned income, such as:
There is good news. Citizens living outside the United States may be able to exclude up to $91,500 of their 2010 foreign source income if they meet certain requirements.
If you're married and you both work abroad and meet either the bona fide residence test or the physical presence test, each of you can choose the foreign earned income exclusion. Together, you can exclude as much as $183,000 for the 2010 tax year.
If you earn income from outside the country, please be sure to meet with us about it. We need to address all the tax implications of this situation.
Check Your Withholdings
With less than two months remaining in the calendar year, it's a great time to double check your federal withholding to make sure enough taxes are being taken out of your pay.
The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.
Certain folks should pay particular attention to their withholding. These include:
As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010 may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want.
Failure to adjust withholding could result in potentially smaller refunds or, in limited instances, a taxpayer may owe tax rather than receive a refund next year.
An easy way to check how much you'll owe this year is to use the 1040 Tax Calculator on our website. Or just give us a call and we'll figure it out with you.
Expanded Adoption Credit
The Affordable Care Act raises the maximum adoption credit to $13,170 per child in 2010, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees, and travel expenses. Income limits and other special rules apply.
If you adopted a child this year, you may be eligible for this credit. Make sure you contact us early, though. To claim this tax relief, we must file a paper return, which means your refund will be slower than if you could file electronically.
Tax Due Dates for November 2010
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