Tax Saving Strategies for the 2011 Filing Season

© 2011 American Institute of CPAs

Tax Saving Strategiesfor 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

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line up with others


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

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AMT Exemption Amounts and Patch

>Single/Head of Household $47,450

>Married/Joint/Qualifying Widow(er) $72,450

>Married/Filing Separately $36,225

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Estate Tax - New Law, New Options

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>2010: Carryover basis and limited step-up basis regime for inherited assets or new estate tax law

>2010, 2011, and 2012: $5 million exemption, top rate of 35%

>Due date for filing estate tax returns extended

>No change in gift tax in 2010 (annual exclusion $13,000)


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

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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)

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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

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*MAGI


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

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*MAGI


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

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*MAGI


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

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The Basics

>Filing Status

>Tax Rates

>Standard Deduction

>Standard Deduction Additions

>Itemizing Deductions

>Personal Exemptions

>Charitable Deductions

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Filing Status

>Single

>Married Filing Jointly

>Married Filing Separately

>Head of Household

>Qualifying Widow(er)/Surviving Spouse

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Tax Rates

>10%

>15%

>25%

>28%

>33%

>35%

>Married filing jointly treatment

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Personal Exemptions

Top Tax Bracket Exemption Value

10% $365

15% $548

25% $913

28% $1,022

33% $1,205

35% $1,278

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Standard Deduction

Filing Status Standard Deduction

Single $5,700

Married Filing Separately $5,700

Married Filing Jointly $11,400

Qualifying Widow(er) $11,400

Head of Household $8,400

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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

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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

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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

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Tax Strategies for Life

>Family

>Education

>Job

>Home

>Investments

>Retirement

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Family Strategies

>Kiddie Tax

>Adoption Credit

>Dependent Care Credit

>Long-Term Care Premium

>Earned Income Credit

>Shifting Income

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Kiddie Tax

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>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


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

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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

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Long-Term Care Premium

>Tax deduction for portion of insurance costs

>Age-based deduction amount

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Family Size Maximum Credit

Three or More Children $5,666

Two Children $5,036

One Child $3,050

No Children $457

Earned Income Credit

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Phaseout rules apply


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

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Education Strategies

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>Tax Credits

>Lifetime Learning Credit

>Student Loan Deduction

>Higher Education Tuition and Fees Deduction

>529 Plans

>Prepaid Tuition Plans

>U.S. Savings Bonds


Tax Credits

>American Opportunity Tax Credit and Lifetime Learning Credit

>Not available to all taxpayers

>Restrictions apply

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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)

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*Pertains to MAGI


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)

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*MAGI


Higher Education Tuition and Fees Deduction


– Modified AGI

• Does not exceed $65,000

• Does not exceed $130,000 (married/filing jointly)


– Phaseout limits apply*

• $65,000 – $80,000

• $130,000 – $160,000 (married/filing jointly)

>Barred in certain circumstances

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*MAGI


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

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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

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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)

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*MAGI


Job Strategies

>Health Flexible Spending Arrangements

>Health Savings Accounts

>Economic Recovery Payments

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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

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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

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Economic Recovery Payments

>One-time, tax-free $250 payment

>Making Work Pay Credit offset for 2010 payments

>Exceptions apply

>Possible tax liability

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Homeowner Strategies

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>Deductions

>Selling Your Home

>New Energy Incentives


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

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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

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New Energy Incentives

> Qualified Energy Efficiency Improvements and Residential Energy Property Expenditures Credit

>Residential Energy Efficiency Property Credit

>Alternative Motor Vehicle Credit

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Investment Strategies

>Dividends

>Capital Gains Tax

>Offset Capital Gains with Losses

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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

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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

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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

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Retirement Strategies

>Employer-Sponsored Plans

>IRAs

>Traditional IRA to Roth IRA

>Rollover to In-Plan Roth IRA

>Inherited IRA

>Saver’s Credit

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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

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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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Traditional IRA to Roth IRA

>No dollar limit on conversion amount

>No early-distribution penalty in certain circumstances

>Percentage of conversion income deferred to future years

>No modified AGI requirement

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Rollover to In-Plan Roth IRA

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> Certain 401(k), 403(b) and 457(b) plans permit rollover contributions (after Sept. 27, 2010)

>Special rules for 2010 rollovers

>Opportunity to unwind conversion


Inherited IRA

>Taxable distributions to beneficiaries

>Exceptions apply

> 10% early distribution penalty not applicableto taxable distributions

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Saver’s Credit

>Nonrefundable tax credit for qualified taxpayers

>10%, 20% or 50% of AGI (first $2,000 of contributions)

>AGI requirements are less than:

– $55,500 (married filing jointly)

– $41,625 (head of household)

– $27,750 (single, married filing separately or qualifying widow/er)

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Key Takeaways

>Follow CPA’s advice

>Don’t wait until it’s too late

>Plan for tax savings year-round

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Thank you.

Tax Saving Strategies for the 2011 Filing Season

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