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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 - PowerPoint PPT Presentation
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© 2011 American Institute of CPAs
Tax Saving Strategiesfor the 2011 Filing Season
Updated January 2011
© 2011 American Institute of CPAs
Select 2010 Tax-Law Changes
>Wide-ranging tax-law changes in 2010:
– Health care
– Retirement
– Home ownership
– Unemployment
– And many others
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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)
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
The Basics
>Filing Status
>Tax Rates
>Standard Deduction
>Standard Deduction Additions
>Itemizing Deductions
>Personal Exemptions
>Charitable Deductions
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© 2011 American Institute of CPAs
Filing Status
>Single
>Married Filing Jointly
>Married Filing Separately
>Head of Household
>Qualifying Widow(er)/Surviving Spouse
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© 2011 American Institute of CPAs
Tax Rates
>10%
>15%
>25%
>28%
>33%
>35%
>Married filing jointly treatment
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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
Tax Strategies for Life
>Family
>Education
>Job
>Home
>Investments
>Retirement
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© 2011 American Institute of CPAs
Family Strategies
>Kiddie Tax
>Adoption Credit
>Dependent Care Credit
>Long-Term Care Premium
>Earned Income Credit
>Shifting Income
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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
Long-Term Care Premium
>Tax deduction for portion of insurance costs
>Age-based deduction amount
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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
Tax Credits
>American Opportunity Tax Credit and Lifetime Learning Credit
>Not available to all taxpayers
>Restrictions apply
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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
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
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*MAGI
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
Job Strategies
>Health Flexible Spending Arrangements
>Health Savings Accounts
>Economic Recovery Payments
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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
Homeowner Strategies
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>Deductions
>Selling Your Home
>New Energy Incentives
© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
Investment Strategies
>Dividends
>Capital Gains Tax
>Offset Capital Gains with Losses
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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
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
© 2011 American Institute of CPAs
Inherited IRA
>Taxable distributions to beneficiaries
>Exceptions apply
> 10% early distribution penalty not applicableto taxable distributions
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© 2011 American Institute of CPAs
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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© 2011 American Institute of CPAs
Key Takeaways
>Follow CPA’s advice
>Don’t wait until it’s too late
>Plan for tax savings year-round
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© 2011 American Institute of CPAs
Thank you.