Permanent Value

2010 Tax Planning

Nathaniel Ritchison
February 2nd, 2010

Riding off into the Sunset

Some call the 2010 tax year the Sunset Year.  With the Bush tax cuts of 2001 and 2003 set to expire at the end of the year and a new administration taking the reins of fiscal policy, this year will offer little resemblance to a peaceful sunset over the dusty plains of the western frontier.  However contentious this year may be in Washington, there are ways individuals and businesses can plan ahead and get the most out of their 2010 tax return.  Below are a few of the largest and farthest reaching changes for this tax year.

The Good

Roth IRA Conversions-

Beginning in 2010 (and beyond) there will be no income limits for individuals that would like to convert their traditional IRA to a Roth IRA.  As an added bonus, if you choose to convert your IRA in 2010 you have the option to split the tax bill over 2011 and 2012.  Doing a conversion generally makes the most sense if you expect to be in the same (or higher) tax bracket in retirement and can pay the tax bill from funds outside of your Roth IRA.  We would be happy to illustrate the cost and benefit for you at your next meeting.

Phase Outs-

The phase out rules for itemized deductions and personal exemptions will go away in 2010.  This is especially beneficial to high income earners.  But act fast, the limits will come back with vengeance in 2011 as this is an area that President Obama is specifically targeting.

The Estate Tax-

Both the estate tax and generation-skipping tax (to the surprise of most estate attorneys) disappeared on January 1st, while the top rate on the gift tax dropped to 35%.  The downside of the estate tax repeal is that property that would normally receive a step-up in basis on the date of death is now subject to the descendants cost basis. These changes most likely won’t stay long and any updates to the estate tax could be retroactive to the beginning of the year.

Medicare Part B premium-

For about 75% of all Social Security beneficiaries the Part B monthly premium will remain at $96.40 for 2010.  This is due to a new law that prevents Part B premium hikes when there is no cost-of-living increase on benefits (as was the case in 2010).

The Bad

New vehicle sales tax-

Effective January 1st individuals will no longer be able to take the itemized deduction or increase in standard deduction for the sales tax on the purchase of a new motor vehicle.

Sales tax-

Also being removed from your federal itemized deduction is the ability to deduct state and local sales tax.

Unemployment income-

In 2010 you can no longer exclude $2,400 from your taxable income like you did in 2009.

Charitable distribution/contributions-

Last year you were able to exclude from your income charitable distributions made directly from your IRA.  No longer in 2010.

Alternative Minimum Tax Exemption-

Unbelievably the AMT exemption which already affects a growing number of middle class taxpayers because it’s not indexed for inflation will actually decrease in 2010 to $33,750 for single filers and $45,000 for those married filing jointly.  Congress still has time to make changes to AMT like they did last year.

Retirement Contributions-

There are no changes to the maximum contribution (or catch-up contributions) an individual can make to an IRA or qualified retirement plans from 2009.  Let us help you determine your limit and eligibility by giving us a call.

Mileage reimbursement rates-

For those that deduct their mileage expense for business purposes, the 2009 rate of $0.55 per mile will be falling to $0.50 per mile in 2010.

Section 179 Expense Deduction-

A very popular deduction, the section 179 deduction allows businesses to accelerate their equipment expense.  This deduction will drop from $250,000 to $135,000 if congress doesn’t step in!

The Ugly

The (ugly) truth in the tax world is that at some point tax revenue will have to rise in order to help pay for the economic stimulus and wars abroad.  With news on the 2011 budget proposals coming out almost hourly the last few weeks, there might still be some hope that these deductions get revived before they going riding off into the sunset.