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Tax Saving Strategies for the 2011 Filing Season

Tax Saving Strategies for the 2011 Filing Season. Updated January 2011. Select 2010 Tax-Law Changes. Wide-ranging tax-law changes in 2010: Health care Retirement Home ownership Unemployment And many others. Alternative Minimum Tax (AMT). AMT Triggers

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Tax Saving Strategies for the 2011 Filing Season

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  1. Tax Saving Strategiesfor the 2011 Filing Season Updated January 2011

  2. Select 2010 Tax-Law Changes • Wide-ranging tax-law changes in 2010: • Health care • Retirement • Home ownership • Unemployment • And many others

  3. Alternative Minimum Tax (AMT) • AMT Triggers • Higher-than-average dependency exemptions • Large deductions for state and local income taxes • High real estate taxes • High miscellaneous itemized deductions and medical expenses

  4. AMT Exemption Amounts and Patch • Single/Head of Household $33,750 • Married/Joint/Qualifying Widow(er) $45,000 • Married/Filing Separately $22,500 As of mid-December, Congress is considering an AMT Patch for 2010.

  5. Estate Tax • No estate tax for those deceased in 2010 • Carryover basis and step-up basis for certain inherited assets • Returns in 2011 • No change in gift tax in 2010 (annual exclusion $13,000)

  6. First-Time Homebuyer Credit • Required purchase periods • First-time homebuyer/long-time resident requirement • Different credit amounts and phaseout ranges • Unavailable in certain circumstances • Expanded availability and repayment under certain circumstances • Repayment terms for 2008 purchases

  7. Mortgage Debt Forgiveness • Mortgage liability post-foreclosure • Tax-free debt discharge on/after Jan. 1, 2007, and before Jan. 1, 2013 • Primary resident requirement • $2 million debt limit ($1 million if married filing separately)

  8. COBRA Premium Assistance • 65% premium federal government subsidy • Termination period: on or after Sept. 1, 2008 and before June 1, 2010 • Fifteen-month availability • Feb. 17, 2009, coverage date • Tax-free feature phaseout* • $125,000 to $145,000 (single filers) • $250,000 to $290,000 (joint filers) • Other options available *MAGI

  9. Making Work Pay Credit • 6.2% of income earned, up to $400 tax credit ($800 if married filing jointly) • Phaseout range*: $75,000 to $95,000 (single filer) and $150,000 to $190,000 (married filing jointly) • Received through reduction in tax withholding and estimated tax payments • Special situation: both spouses employed and had withholdings adjusted *MAGI

  10. American Opportunity Tax Credit • Applies to first four years of college/ postsecondary school • $2,500 per student per year • Expanded qualified tuition and related expenses • Phaseout ranges* • $160,000 to $180,00 (married filing jointly) • $80,000 to $90,000 (other filers) • Allowed against AMT *MAGI

  11. Child Tax Credit • $1,000 credit per qualifying child • Child: • Younger than age 17 • Qualified dependent • U.S. citizen or resident • Phaseout for higher-income families • Enhanced or Additional Child Tax Credit

  12. The Basics • Filing Status • Tax Rates • Standard Deduction • Standard Deduction Additions • Itemizing Deductions • Personal Exemptions • Charitable Deductions

  13. Filing Status • Single • Married Filing Jointly • Married Filing Separately • Head of Household • Qualifying Widow(er)/Surviving Spouse

  14. Tax Rates • 10% • 15% • 25% • 28% • 33% • 35% • Married filing jointly treatment

  15. Personal Exemptions

  16. Standard Deduction

  17. Standard Deduction Additions • Additional standard deduction for taxpayers age 65 and older or blind: • $1,400 (single or head of household) • $1,100 (married filing jointly, married filing separately or qualifying widow/er) • State/federal filing requirements

  18. Itemizing Deductions • Alternative to standard deduction • Use when total itemized deductions exceed standard deductions • No phaseout rules apply • Wide range of itemized deductions • Advance planning reduces tax liability • Other deductions available

  19. Charitable Deductions • 50% of AGI deduction • Documentation required for monetary donations and some non-monetary donations • Donations of $250 or more (substantiation) • Donate appreciated property and avoid capital gains tax • Clothing, household items and automobiles in good condition

  20. Tax Strategies for Life • Family • Education • Job • Home • Investments • Retirement

  21. Family Strategies • Kiddie Tax • Adoption Credit • Dependent Care Credit • Long-Term Care Premium • Earned Income Credit • Shifting Income

  22. Kiddie Tax • Makes income shifting to children less beneficial • Applies to • All children younger than age 18 • Most children who are age 18 • Most full-time students between ages 19-23

  23. Adoption Credit • Up to $13,170 per eligible child • Employer reimbursement of up to $13,170 • Phaseout rules apply • Special-needs child — full credit regardless of actual expenses • Rules for U.S. and foreign adoptions differ

  24. Dependent Care Tax Credit • Child must be younger than age 13 and a dependent • 20% to 35% of qualifying expenses (up to $2,100) • Up to $3,000 of expenses ($6,000 for two or more dependents) • AGI considered • May also apply to other dependents • Employer-provided day care benefit • Documentation required

  25. Long-Term Care Premium • Tax deduction for portion of insurance costs • Age-based deduction amount

  26. Earned Income Credit Phaseout rules apply

  27. Shifting Income • Kiddie Tax option • Gifts: • Up to $13,000 not subject to gift tax ($26,000 if split with spouse) • Family business (hiring your minor children): • First $5,700 earned is tax-free • Earned income not subject to Kiddie Tax • W-2 and other tax forms

  28. Education Strategies • Tax Credits • Lifetime Learning Credit • Student Loan Deduction • Higher Education Tuition and Fees Deduction • 529 Plans • Prepaid Tuition Plans • U.S. Savings Bonds

  29. Tax Credits • American Opportunity Tax Credit and Lifetime Learning Credit • Not available to all taxpayers • Restrictions apply

  30. Lifetime Learning Credit • Worth up to $2,000 per year • Applies to undergraduate, graduate and professional-degree expenses • Not limited to any number of years • Phaseout ranges* • $50,000 to $60,000 • $100,000 to $120,000 (joint filers) *Pertains to MAGI

  31. Student Loan Deduction • Deduct up to $2,500 • No limit on repayment period • No need to itemize • Qualification requirements • Phaseout range* — $60,000 to $75,000 ($120,000 to $150,000 for joint filers) *MAGI

  32. Higher Education Tuition and Fees Deduction • Deduct up to $4,000 • Modified AGI • Does not exceed $65,000 • Does not exceed $130,000 (married/filing jointly) • Deduct up to $2,000 • Phaseout limits apply* • $65,000 – $80,000 • $130,000 – $160,000 (married/filing jointly) • Barred in certain circumstances *MAGI

  33. 529 Plans • Tax-advantaged way to save money for college expenses • Money grows tax-free • Tax-deferred earnings • Qualified tax-free withdrawals • Wide range of qualified expenses (no set dollar limit) • Can be used for gifts from family members

  34. Prepaid Tuition Plans • State-instituted plan • Plan inception date and child’s age key factors to amount contributed • Tuition costs covered — not room, board or books • In-state vs. out-of-state schools • Tax treatment similar to 529 Plans

  35. U.S. Savings Bonds • Tax benefits for qualified higher-education expenses • Benefit limited in certain circumstances • Phaseout ranges* (interest exclusion) • $105,100 to $135,100 (married filing jointly or qualifying widow/er) • $70,100 to $85,100 (single or head of household) *MAGI

  36. Job Strategies • Health Flexible Spending Arrangements • Health Savings Accounts • Economic Recovery Payments

  37. Health Flexible Spending Arrangements (HFSA) • Tax-free contributions from wages • Fully accessible for certain medical expenses • Terms and limits determined by company plan • Use or lose component • Distributions to reservists in certain circumstances

  38. Health Savings Accounts • Eligibility requirements • Tax advantages – contributions, withdrawals and earnings • Minimum annual HDHP deductible: $1,200 (self only) and $2,400 (family) • Maximum annual deductible/other out-of-pocket expenses: $5,950 (self only) and $11,900 (family) • Employee and employer contributions • Contribution limits

  39. Economic Recovery Payments • One-time, tax-free $250 payment • Making Work Pay Credit offset for 2010 payments • Exceptions apply • Possible tax liability

  40. Homeowner Strategies • Deductions • Selling Your Home • New Energy Incentives

  41. Deductions • Mortgage Interest Deduction • Up to $1 million ($500,000 if married filing separately) of home-acquisition loans • Up to $100,000 ($50,000 if married filing separately) of home-equity loan or line of credit • No restrictions on use of proceeds • Two types of points deductions • Real Estate Taxes • No limits on dollar amount or number of homes • Prepay/delay choice • Option if deduction is not itemized

  42. Selling Your Home • Exclude up to $250,000 in capital gains; $500,000 if married filing jointly or surviving spouse in certain cases • Home owned/used as principal residence at least two of five years preceding sale • Special exceptions available • Available once every two years

  43. New Energy Incentives • Qualified Energy Efficiency Improvements and Residential Energy Property Expenditures Credit • Residential Energy Efficiency Property Credit • Alternative Motor Vehicle Credit

  44. Investment Strategies • Dividends • Capital Gains Tax • Offset Capital Gains with Losses

  45. Dividends • Top tax rate of 15% for qualifying dividends • 0% for taxpayers in 10% or 15% bracket • Check ex-dividend date • Does not apply to interest payments • Do not let tax considerations drive investment decisions

  46. Capital Gains Tax • Maximum tax rate on net long-term gains is 15% • 0% for taxpayers in 10% or 15% bracket • Asset must be held more than one year • 28% maximum tax rate for collectibles

  47. Offset Capital Gains with Losses • Capital losses netted against capital gains • $3,000 ($1,500 if married filing separately) in net long-term capital losses can be deducted against ordinary income or total net losses • Keep track of losses – unused, and short and long term • Beware of wash sale rule

  48. Retirement Strategies • Employer-Sponsored Plans • IRAs • Traditional IRA to Roth IRA • Rollover to In-Plan Roth IRA • Inherited IRA • Saver’s Credit

  49. Employer-Sponsored Plans • Pre-tax contributions help reduce tax bill • Employer matches • $16,500 maximum contribution (younger than age 50) • $5,500 additional “catch-up” contribution (age 50 or older) • No minimum distribution requirement • Roth 401(k) option

  50. Individual Retirement Accounts (IRAs) • $5,000 maximum contribution • $1,000 additional “catch-up” contribution (age 50 or older) • Two types: traditional and Roth • Phaseout rules apply • No minimum distribution requirement • Open/contribution deadline: April 15, 2011

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