Tax eAlert: Year-End Individual Income Tax Planning Considerations

December 2010

  • Remember to revise the amount you contribute through your employer's health care flexible spending account. Beginning in 2011, you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin, cold medicine, and antacids.

  • Consider converting your traditional IRA into a Roth IRA. The conversion will generate income that will be taxable at your election: (1) all in 2010 - take advantage of lower tax rates and pay the tax in April 2011, or (2) in equal amounts in 2011 and 2012 - defer payment of tax until future years, paying half in April 2012 and half in April 2013. With the market down and income tax rates scheduled to rise, converting now may mean you pay lower income taxes overall.

  • Don't forget to take required minimum distributions from your IRA or 401(k) plan if you have reached age 70 1/2. Congress provided a one-year free pass, and no required minimum distributions were required in 2009. But in 2010, they are once again required. If you do not take a required withdrawal, you may be subject to a 50 percent penalty on the amount not withdrawn. If you turned age 70 1/2 in 2010, you can delay the required withdrawal until 2011, when you must take both your 2010 and 2011 withdrawals. The double withdrawal in 2011 may push you into a higher income tax bracket or have a detrimental impact on income tax deductions.

  • Contemplate purchasing qualified small business stockbefore the end of this year. There is no tax on gain from the sale of such stock if it is: (1) purchased after September 27, 2010, and before January 1, 2011, and (2) held for more than five years. The stock must be issued by a C corporation with total gross assets of $50 million or less and several other technical requirements must be met.

  • Consider making energy saving improvements to your home to qualify for a 30 percent tax credit. Putting in extra insulation, installing qualifying windows or doors, or upgrading to a high-efficiency furnace can qualify you for a tax credit equal to 30 percent of the improvement cost (installation and other labor costs do not qualify), up to a $1,500 tax credit - the maximum combined total for 2009 and 2010 energy saving improvements. This tax credit is scheduled to expire after December 31, 2010. Energy-generating home improvements (such as solar electric panels or solar hot water heaters) will get you an even bigger tax credit... and that credit is scheduled to continue through 2016.

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