Your Individual Income Taxes

You may think you have no control over your taxes, but there are a number of strategies that can be employed to reduce or delay your tax bite. To take advantage of these possibilities requires knowledge of what strategies are available.

You are encouraged to read this guide so that you will have a basic understanding of the income tax structure, recent changes in tax law, how the various rules and changes might affect you, and the options and strategies that are available.

Even though you have your returns professionally prepared, a little tax planning in advance may yield benefits down the road. It is a far better approach than waiting until your return is prepared to find out whether you owe, get a refund, or could have done something to alter the final outcome.

This Tax Planning Guide is an abbreviated summary of our complex tax system, and you are encouraged to contact this office so we can review your unique tax situation before employing any of the options or strategies included in the guide.

2011 Year-End Strategies

With the economy still in the doldrums, this year has not been the greatest year for most individuals.  Unemployment is still high, incomes are lower, retirement savings have declined and many taxpayers are struggling to make ends meet.  The government has provided a variety of tax incentives to help weather the economic storm, and you are urged to take advantage of these special tax benefits as well as other strategies to keep your tax bite as low as possible. 

• State Estimated Tax Payments – Although the deadline to make the current year 4th quarter state estimated tax payment is January 15 of the next year for most states, the payment will count as a tax deduction on the federal Schedule A for the current year if that payment is made before the end of December.

• Property Taxes – Generally, your property taxes are billed in installments, and that’s how most people pay them. However, the tax can be paid all at once, if it provides a greater tax benefit for the current year. 
Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible to the extent a taxpayer is subject to the AMT. Taxpayers subject to the AMT might, instead, consider deferring deductible tax payments to the subsequent year.

• Bunch Deductions - If your tax deductions normally fall short of itemizing your deductions, or even if you are able to itemize but only marginally, you may benefit from using the “bunching” strategy.  For more on this technique, read the article “Bunching Your Deductions Can Provide Big Tax Benefits”.  

• Required Minimum Distributions (RMDs) from Retirement Plans – If you are in a low or zero tax bracket this year, it may be to your benefit to take a withdrawal more than the minimum.  RMDs generally apply to individuals age 70 ½ and older, but even younger retirees who are not yet required to take a distribution may find this strategy beneficial. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of the Social Security income.

• Tax Credit for First Four Years of College - The American Opportunity Credit (AOC) takes the place of the Hope education credit and provides a credit for tuition and certain other expenses of the first four years of college (Hope only applied to the first two years).  So even if you used the Hope credit in prior years you may still qualify for the AOC.  The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.  40% of the credit is refundable which means that taxpayers with little or no tax liability can still benefit from the credit.  This credit does begin to phase-out for single taxpayers with AGI above $80,000 ($160,000 for joint filers) and no credit is allowed for taxpayers filing married separate.

Important: The AOC is only applicable to tax years 2009 through 2012.  Without Congressional action, 2012 is the final year for this more lucrative education credit.

• Energy-Efficient Home Improvements – Homeowners who have or will make certain energy-efficient improvements to their existing homes may qualify for energy credits up to 10% of the cost (credit limited to a lifetime maximum of $500 taking into account credit claimed in prior years).  This credit applies to the following qualified energy efficient improvements:  exterior windows and skylights, exterior doors, metal and asphalt roofs, heating systems, air-conditioning systems and insulation.  With many contractors without work this could be an opportune time to negotiate reasonable prices and make those home modifications, but the work must be completed before year-end if you want the credit. Without Congressional action, this credit expires at the end of 2011. 

• Roth IRA Conversions – If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost. Taxpayers are able to convert funds in regular IRAs (as well as qualified retirement plans) to Roth IRAs regardless of their income level.

• Review Estimated Tax Payments and Withholding – Ensure they are sufficient to meet the “safe-harbor” payment amounts so as to avoid underpayment penalties.

• IRA and Self-Employed Retirement Plan Contributions – The primary purpose of these plans is to provide for your future retirement and whenever you are eligible and financially able, you should always contribute as much as possible.  Contributions also provide a tax deduction when they are made to Self-employed plans and to most traditional IRAs.  The benefit derived from this tax deduction is based upon your tax bracket.  (Some contributions to traditional IRAs may not be deductible if you also participate in another retirement plan, depending on your income level.)  Those individuals who simply prefer the Roth option, but are barred from making Roth contributions because their income exceeds the AGI phase out limitations, might consider making a non-deductible traditional IRA contribution and then converting it to a Roth IRA since as of 2010 there are no income limitations on conversions.

• Establish a Retirement Plan – If you do not already have a retirement plan and you are considering one, there are several options.  Some, such as Keogh or 401(k) plans, must be set up before the year’s end.   If you are an owner-only business, you should review the article “Owner-Only Businesses Should Consider a Solo 401(k) Plan,” which provides great benefits for business owners with no employees other than their spouse. 

• Capital Loss Carryovers – If you have carryover capital losses remember you can only claim a maximum $3,000 net capital loss on your return and the remainder carries over to the subsequent year.  However, you may have some gains you can take to offset the carryover.  (If you sell at a gain but wish to repurchase stock in the same company, note that the wash sale rules don’t apply—they only apply to losses— so you will not need to wait 30 days to make the repurchase.) For long-term planning, it is important to keep in mind that the current lower capital gains rates of 0% and 15% are only available through 2012.  After that, without Congressional intervention, the rates return to the pre-2003 levels of 10% and 20%.  For more details on this strategy, read the “Fine-Tuning Capital Gains and Losses” article.   

• Non-Cash Charitable Donations – If you itemize your deductions and your garage and closets contain never-used items, you might consider donating those items to charity before year-end to increase your deductions. To claim a deduction for donated clothing and household goods, they must be in good condition or better, and the donations must be substantiated by a written receipt that includes the name of the charity, dates and location of the donation and a reasonably detailed description of the property donated.   A receipt is not required where the value is less than $250 and it is impractical to obtain one (for example, when items are left at an unattended drop site). If, instead, you decide to sell some of the property, the income is generally tax free provided you sell each item for less than your cost or basis in the property.

• Deduct IRA Losses – If a traditional IRA account that includes non-deductible contributions declines in value and the value of all of your IRA accounts combined is less than the sum of your non-deductible contributions, you can take a loss by withdrawing from (closing) all your IRA accounts.  However, this loss is beneficial only if you itemize your deductions and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year.

The foregoing are frequently encountered tax strategies that can be employed by most, but by no means all, taxpayers.  Please call this office if have questions regarding these issue or others or would like to engage in some year-end tax planning.  If you have a substantial increase or decrease in income this year it may be wise to schedule an appointment before the holidays to strategize.

Understanding Your Tax Basics

No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies.

• Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.
  
  Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:
  
  • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual for whom the taxpayer may claim a dependency exemption, or
  
  • Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
  
  A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.
  
  Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for taxpayers whose spouse died in one of the prior two years and who has a dependent child at home. The joint rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year.
  
  
• Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer's AGI.
  
  
• Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the rate schedule.
  
  
• Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your
  marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.
  
  When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range.
  
  

  2011 MARGINAL TAX RATES
  TAXABLE INCOME BY FILING STATUS
  Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
  10.0%	8,500	12,150	17,000	8,500
  15.0%	34,500	46,250	69,000	34,500
  25.0%	83,600	119,400	139,350	69,675
  28.0%	174,400	193,350	212,300	106,150
  33.0%	379,150	379,150	379,150	189,575
  35.0%	Over 379,150			Over 189,575

  * Also used by taxpayers filing as Surviving Spouse
  
  
  
• Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2011 is $3,700.
  
  Dependents - To qualify as your dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.
  
  Qualified Child - A qualified child is one that meets the following tests:
  
  (1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences.
  
  (2) Is the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.
  
  (3) Is younger than the taxpayer.
  
  (4) Did not provide over half of his or her own support for the tax year.
  
  (5) Is under age 19 or under age 24 in the case of a full-time student, or is permanently and totally disabled (any age).
  
  (6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).
  
  
• Deductions - Taxpayers can choose between itemizing their deductions or using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2011.
  
  

  Filing Status	Standard Deduction
  Single	$5,800
  Head of Household	$8,500
  Married Filing Jointly	$11,600
  Married Filing Separately	$5,800

  
  
  The standard deduction is increased by multiples of $1,450 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,150. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.
  
  Itemized deductions include:
  
  (1) Medical expenses (limited to those that exceed 7½% of your AGI for the year). Note: the 7½% increases to 10% in 2013 (2017 for seniors);
  
  (2) Taxes consisting primarily of real property taxes, state income (or sales) tax and personal property taxes;
  
  (3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);
  
  (4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,
  
  (5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;
  
  (6) Casualty losses in excess of 10% of $100 per occurrence plus your AGI; and
  
  (7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.
  
  
• Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. An increasing number of taxpayers are being hit with AMT. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, the AMT is not adjusted for inflation, and years of inflation have driven everyone’s income up to the point where more taxpayers are being affected by the AMT. Your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
  
  - Personal and dependent exemptions - are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.
  
  - The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
  
  - Itemized deductions:
  Medical deductions – only allowed in excess of 10% of AGI (7½% normally). This difference will end when the AGI threshold percentage increases to 10% in 2013 (or 2017 for seniors).
  Taxes – are not allowed at all for the AMT.
  Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.
  Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT.
  
  - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.
  
  - Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.
  
  - Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.
  
  The AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2011.
  
  

  AMT EXEMPTION PHASE OUT
  Filing Status	Exemption Amount	Income Where Exemption Is Totally Phased Out
  Married Filing Jointly	$74,450	$447,800
  Married Filing Separate	$37,225	$223,900
  Unmarried	$48,450	$306,300

  
  
  

  AMT TAX RATES
  AMT Taxable Income	Tax Rate
  0 – $175,000 (1)	26%
  Over $175,000 (1)	28%

  
  (1) $87,500 for married taxpayers filing separately
  
  Your tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income.
  
  
• Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.
  
  Child Tax Credit - The child tax credit remains at $1,000 per child through 2012. After 2012, without Congressional action, the credit drops to $500. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer's earned income exceeds a threshold ($3,000 for 2011) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. Through 2012, a credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.
  
  Earned Income Credit - This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,150 (for 2011) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.
  
  
  

  2011 EIC PHASE-OUT RANGE
  Number of Children	Joint Return	Others	Maximum Credit
  None	$12,670 - $18,740	$7,590 - $13,660	$464
  1	$21,770 - $41,132	$16,690 - $36,052	$3,094
  2 3	$21,770 - $46,044 $21,770 - $49,078	$16,690 - $40,964 $16,690 - $43,998	$5,112 $5,751




• Home Energy Credits - There are two distinct categories of home energy credits: (1) Energy-saving improvements (“Residential Energy Property Credit”) to an existing primary residence (allowed in various amounts 2006 through 2011), and (2) Energy-producing (“Residential Energy-Efficient Property Credit”) to a primary or second residence (generally allowed through 2016). The credits are non-refundable credits which are not phased out at higher-income levels and are deductible against the Alternative Minimum Tax. Since the manufacturer will certify the materials that come with their products, the taxpayer does not have to determine whether a home improvement creates or saves energy.
  
  o Residential Energy Property Credit – For energy-savings components installed in or on a taxpayer’s principal residence. The improvement’s original use must commence with the taxpayer and can reasonably be expected to remain in use for at least 5 years.
  
  These include qualified: insulation material or system, exterior windows (including skylights), exterior doors, and metal roofs with appropriate pigmented coatings, asphalt roofing with appropriate cooling granules, hot water boiler and biomass fuel stove. For 2009 and 2010, these items qualify for a credit of 30% of their cost, subject to an overall 2-year (2009 and 2010) maximum credit of $1,500. For 2011, the credit has been reduced to 10% with a lifetime credit maximum of $500. Thus, the $500 maximum must be reduced (but not less than zero) by any credit claimed in years 2006 through 2010.
  
  o Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems.  These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016.
  
  
• Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:
  
  (1) 90% of the current year’s tax liability; or
  
  (2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability.
  
  If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Bunching Your Deductions Can Provide Big Tax Benefits

If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the ‘bunching” strategy.

The tax code allows taxpayers to utilize the standard deduction or itemize their deductions if that provides to be a greater benefit.  As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. 

If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.  

For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses and casualty losses.  The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions; although, there are circumstances where the other deductions might be come into play.   There are many opportunities to bunch deductions, and the following are examples of the most commonly used with the “bunching” strategy:

• Medical Expenses – You contract with a dentist for your child’s braces. He may offer you an up-front lump sum payment or a payment plan.  By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year.  If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes.  If you use a credit card, you must realize that the credit card interest is not deductible and you need to determine if incurring the interest is worth the increased tax deduction.  Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 7.5% of your income is actually deductible.  If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible.  So, there is no tax benefit of bunching medical deductions if the total is less than 7.5% (10% if taxed by the AMT).

If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 7.5% (10%) threshold is less.

• Taxes – Property taxes are generally billed annually at mid-year and most locales allow the tax bill to be paid in semi-annual or quarterly installments.  Thus, you have the option of paying it all at once or paying in installments.  This provides the opportunity to bunch the tax payments by paying one semi-annual (or 2 quarterly) installment and a full year’s tax liability in one year and only paying one semi-annual (or 2 quarterly) in the other year.  In doing so, you are able to deduct 1-½ year’s taxes in one year and ½ a year’s taxes in the other. If you are thinking of being late on the property tax payments as means of bunching, you should be cautious.  The late payment penalty will probably wipe out any potential tax savings.

If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction.  So, for instance, if you are making state quarterly estimates, the fourth quarter estimate is generally due in January of the subsequent year.  This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year.

For 2011, in lieu of deducting state income taxes on your federal return, you may choose to deduct state and local sales tax. If your state income tax that would be deductible is close to the amount you paid in sales tax for the year (or the amount of the sales tax allowed in the tables provided by the IRS), and you were planning to purchase a big-ticket item like a new car, boat or airplane in 2011 or early 2012, you may want to make the purchase in 2011 if the sales tax on the item will cause your total sales tax paid for the year to exceed the state income tax you paid. Not only will you have a higher state tax deduction on your 2011 return, but you could have less income to report in 2012. This is because when you deduct sales tax on your 2011 federal return and in 2012 you receive a refund of state income tax from your 2011 state tax return that you filed in 2012; you do not have to report the refund as taxable income on your federal return for 2012. If you deduct state income tax instead on your 2011 federal return, generally your state income tax refund received in 2012 will be taxable on your 2012 federal return.

A word of caution about the itemized deduction for taxes!  Taxes are only deductible for regular tax purposes.  So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes.

• Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion.  For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent years’ tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year.  Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year.

If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing.

Avail Yourself of Your Employer's Tax-Advantaged Plans

• Dependent Care Benefits - If a taxpayer works and incurs child care expenses, he or she should check to see if their employer has a dependent care program. If the employer does provide dependent care benefits under a qualified plan, the taxpayer may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from his or her wages, which generally provides a greater tax benefit than the child care credit.

• 401(k) or Similar Retirement Plans - If an employer has a 401(k) plan, the employee can elect to defer (pre-tax) a maximum of $16,500 for 2010. If age 50 or older, the maximum is increased to $22,000. These plans are especially beneficial when the employer provides a matching contribution.

• Flexible Spending Accounts - Some employers provide flexible spending accounts, which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for medical and dental expenses.  However, the participant must use the contributed amounts for the qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year.  Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions.

• Education Assistance Programs - If you are receiving educational assistance benefits through an educational assistance program provided by your employer, up to $5,250 of those benefits can be excluded from income each year.  This employee benefit will expire after 2012 without Congressional intervention.

• Stock Purchase and Option Plans -
A variety of plans available to employers are designed to allow the employees to invest in the employer’s stock. The most commonly encountered are:

(1) Employee stock ownership plan (ESOP);
(2) Nonqualified stock option; and
(3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO.

• Tax-Free (Income excludable) Employee Fringe Benefits – Provided the employer provides them, the law allows an exclusion from taxable income for the following benefits:

(1) The cost of up to $50,000 of group term life insurance.
(2) $230 (in 2011) per month for qualified parking.
(3) $230 (in 2011) per month for transit passes, and commuter transportation. 
(4) $20 per month for bicycle commuting expenses.