2010 IS A CRITICAL YEAR FOR TAX PLANNING

Changes in the tax rules for 2010 and the coming sunsetting of the 2001 Tax Act in 2011 make this year a critical one for tax planning

. Whenever significant changes occur in the tax law, there are both opportunities and pitfalls to analyze if you want to manage your tax liability.

First, take a look at a few of the 2010 changes that you need to factor into your planning.

Required minimum distributions from retirement plans are back for individuals aged 70 and older. December 31, 2010, is the deadline for taking the required distribution for this year. However, if this is the first year you're required to take a withdrawal from your retirement funds, you may choose to delay that first distribution until April 1, 2011. Doing so means you'll have to take two distributions in 2011. Distributions are taxable, so depending on your income and the tax rates in both years, delaying may not be to your advantage.

Converting a traditional IRA to a Roth IRA is now allowed for everyone, regardless of income. The prior $100,000 income limit ended this year. If you do a conversion this year, you can choose to report the taxable income on your 2010 tax return, or split it and report half on your 2011 return and half on your 2012 return. Again, the likelihood of higher tax rates in 2011 and beyond must be considered in your decision.

The phase-out of itemized deductions and personal exemptions for high-income taxpayers ended this year, thanks to a provision in the 2001 Tax Act. Because that law sunsets next year, the phase-outs return in 2011. In deciding whether to bunch itemized deductions into this year or next, consider again the tax rates for both years and a full deduction vs. a partial one.

Second, realize that this might be the last year to take advantage of certain credits, deductions, and other familiar tax breaks. Tax rates will change next year, making the timing of income and deductions important. Take the time to plan now while you still have several months for your actions to make a difference. To discuss your tax-cutting options at this critical time, please contact our office.

2010 IS A CRITICAL YEAR FOR TAX PLANNING

By: Daniel Gilliland, CPA

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