Income Tax Planning Basics for 2010

In Tax Planning by Daniel Friedel

With a substantial portion of provisions in the Internal Revenue Code (Code) set to expire the end of this year, I am strongly encouraging my clients to take advantage of the current tax planning opportunities available this year.  In the midst of the over sensationalized estate tax repeal and first-time homebuyer credit, the Code provides numerous other tax benefits that will only be around this year.   Unless you plan on buying a house (or dying) this year, you should consider getting an early start on your 2010 tax planning to take full advantage of these freebies while they are still around.

Below is a starting point for assessing your 2010 tax situation and determining whether or not consulting a tax attorney might help you reduce your bottom line this year.

Basics

Because many tax benefits are tied to or limited by adjusted gross income (AGI) — IRA deductions, for example — a key aspect of tax planning is to estimate both your 2009 and 2010 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI.

Traditional IRAs:

Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2009 is $5,000. For 2009, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals.

Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2009, the AGI phase-out range for deductibility of IRA contributions is between $55,000 and $65,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

Roth IRA conversions:

Regardless of income, taxpayers can convert traditional IRA accounts to Roth IRA accounts. Previously, taxpayers with modified adjusted gross income over $100,000 could not make the conversion. Also, married persons filing separate returns are now eligible to make the conversion. Note that the converted amounts are includible in income, however, for conversions taking place in 2010, a taxpayer can elect to ratably include the amount over two years in 2011 and 2012.

Lower capital gains rates:

The 15% capital gains rate (0% for taxpayers below the 15% tax bracket) will increase to 20% in 2011. Qualifying dividends taxed at reduced capital gains rates will be taxed at ordinary income rates beginning in 2011.

Lower income tax rates:

Legislation in 2001, reduced the tax rates on ordinary income through 2010.  Accordingly, these rates will likely change beginning in 2011.

2009 Tax Rates: 10%, 15%, 25%, 28%, 31%, and 35%

2010 Tax Rates: 10%, 15%, 25%, 28%, 33%, and 35%

This is the rate at which your last dollar of income is taxed. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).