Summer is the time that many people enjoy pleasurable pursuits. It might be golfing or boating, sightseeing or simply relaxing on a beach or at a pool. But you don’t have to limit your “fun” to outdoors activities.
Strategy: Take time to assess your tax situation. By making a few moves midway through the year, you can cut your 2010 tax bill by hundreds or thousands of dollars.
On the other hand, if you wait until the end of the year to seize these tax-saving opportunities, it’s often too late. Here are 10 timely techniques to contemplate.
1. Ramp up equipment purchases. The new Hiring Incentives to Restore Employment (HIRE) Act gives the tax go-ahead to spend freely. Under Section 179 of the tax code, you can write off up to $250,000 of qualified business assets placed in service in tax years beginning in 2010. Prior to the new law change, the maximum deduction was set at only $134,000.
The maximum Section 179 deduction is reduced for purchases over $800,000—a lofty figure. The HIRE Act hiked this threshold from $530,000 for tax years beginning in 2010.
Tip: The Section 179 deduction applies to the full cost even if you borrow some of the money to make the purchases.
2. Move into your new home. The homebuyer’s credit isn’t limited to first-time purchases. For acquisitions after Nov. 6, 2009, you can claim a maximum credit of $6,500 if you’ve owned and used a home as your principal residence for any five consecutive years out of the past eight.
The homebuyer’s credit expired after April 30, but you still qualify if you had a binding contract in place on the date and you complete the transaction before July 1.
Tip: If you’re having a new home built under a pre-May 1, 2010, contract, you must actually occupy the home by June 30.
3. Protect your capital losses. Under the “wash sale” rule, you can’t deduct a loss on the sale of securities if you acquire substantially identical securities within 30 days of the sale. But you have plenty of room to maneuver at midyear without forfeiting a capital loss. For instance, if you sell a stock at a loss on July 1, you can buy it back on Aug. 1 with no problem. The loss can offset capital gains plus up to $3,000 of ordinary income in 2010.
Tip: If you can’t wait a month to reacquire stock you think will rebound, buy more shares first and sell the original shares more than 30 days later.
4. Avoid an AMT ambush. Did you get a surprise notice from the IRS informing you that you owed the alternative minimum tax (AMT) for a prior year? Don’t let it happen again.
The AMT is based on a special calculation involving certain adjustments and subtraction of an exemption amount. You may run into trouble if you have an overabundance of preferential tax items. Review your situation now with a tax pro so you can determine whether it makes sense to bypass a few tax preferences.
Tip: Congress has provided some small relief in recent years by bumping up the exemption amounts. Expect another “patch” for the 2010 tax year.
5. Exhaust your energy credit output. The tax law allows you to claim a credit of up to 30% of the cost of installing energy-efficient products in your home. The improvements may range from a new water heater to insulation materials. The maximum $1,500 credit is available for purchases made from Jan. 1, 2009, through Dec. 31, 2010.
If you haven’t reached the $1,500 limit yet, take steps to maximize the credit this year. For instance, you might install a new air conditioning system before the summer heat kicks in.
Tip: To qualify, the home must be your principal residence. There’s no credit for energy-saving improvements made to a vacation home.
6. Secure exemptions for dads and grads. If you provide over half the annual support of a relative, such as a child or an elderly parent, you may be able to claim a dependency exemption for that person. Each personal exemption (including dependency exemptions) is $3,650 in 2010 (the same as 2009).
No exemption is allowed if the relative has more than $3,650 in taxable income this year. But this restriction doesn’t apply to a child under age 19 or a full-time college student under age 24. For example, if your child graduated in May, you probably still qualify. Give a generous graduation gift of cash if it will push you over the half-support mark. Similarly, extra cash given to dad on Father’s Day may salvage an exemption.
Tip: The tax-law provision phasing out personal exemptions for high-income taxpayers is gone for 2010. So you can reap the full tax benefit for supporting a relative.
7. Pull the trigger on a Roth conversion. For the first time, many high-income taxpayers can convert the assets in a traditional IRA to a Roth IRA. Prior to 2010, a conversion wasn’t allowed in a year in which your modified adjusted gross income (MAGI) exceeded $100,000. Payoff: Although the conversion is taxable, future distributions from the Roth may be tax-free. Or you can preserve the entire nest egg for your heirs without taking lifetime withdrawals (unlike a traditional IRA).
To sweeten the deal, the taxable income from a 2010 conversion can be split evenly over the following two years—2011 and 2012.
If you’re planning to convert this year, do it now if you think the stock market will keep rising. Reason: The tax is based on the value of assets on the conversion date. Therefore, you can lower the tax hit by converting sooner rather than later.
Tip: If the market falters, you can recharacterize your Roth back into a traditional IRA.
8. Pack off the kids to day camp. If you pay someone to watch an under-age-13 child while you and your spouse work, you may be eligible for a dependent care credit. The credit is generally equal to 20% of the first $3,000 of qualified expenses for one child: $6,000 for two or more children.
This tax break isn’t limited to day care centers. For instance, if you send your children to day camp this summer, the full cost qualifies. But no credit is allowed for overnight camp.
Tip: If one spouse works and the other attends summer school, the couple is treated as being “gainfully employed” for this purpose.
9. Treat a client to a round of golf. Deductions for country club dues are long gone. But you can still qualify for a few tax breaks if you take a client to the club.
The tax law allows you to deduct 50% of your entertainment costs preceding or following a “substantial business discussion.” This can include the cost of the green fees, club and cart rentals and other accessories—even dinner and drinks afterward.
Tip: If the client is from out-of-town, you can hold the business discussion the day before or after the golf outing. Otherwise, it must be on the same day.
10. Hire extra summer workers. If you employ workers from an economically disadvantaged group, your business may be entitled to a Work Opportunity Tax Credit (WOTC). The credit equals 40% of the first $6,000 of wages paid to a qualified worker during the year.
But you might also claim a special “summertime credit” for hiring youths age 16 or 17 who work for your business between May 1 and Sept. 15. The youth must reside in an Empowerment Zone, Enterprise Community or Renewal Community. The WOTC for these workers is 40% of the first $3,000 of wages.
Tip: This credit isn’t related to the credit for hiring unemployed workers. But both are claimed under the general business credit umbrella.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/11807/midyear-tax-planning-soak-up-10-summertime-tax-savings "
