This is the time of year that we real estate investors and other small biz owners are scrambling to make our last minute tax moves. This year is particularly challenging because we STILL are uncertain about what tax rules we will be playing under in the new year.
Now, last night President Obama and the GOP did reach an agreement, in principle, regarding the Bush tax cuts that are scheduled to expire at the end of the year.
Here's the skinny. . .
The income tax cuts would be extended for ALL taxpayers for two years.
The estate tax would be reinstated for two years at a 35% rate and $5 million exemption.
The Earned Income Tax Credit would be extended for two years.
Also included in the agreement, though not a part of the expiring tax cuts:
A “payroll tax holiday” which will reduce payroll taxes (meaning FICA taxes) paid by employees by 2%.
An extension of unemployment benefits for an additional 13 months.
Businesses would be able to write off 100% of capital expenditures in 2011.
Sounds pretty good, right? Only problem? It's NOT a done deal. Until it's finalized we still are left with uncertainty about the new tax rules.
So for today, let's focus on what we know instead of what we don't know and cover some year-end actions that will be helpful regardless of changes to the rules.
Here are few steps that I recommend taking before year's end.
Get your records up-to-date.
Before any tax planning can be done, it's vital to know whether your company made or lost money for the year. To do this, accounting records must be up-to-date. I am amazed at the number of business owners I know who let their records slide for months and, unfortunately, may not be prepared to think about year-end tax planning.
Roll over your traditional IRA into a Roth.
While you don’t get a tax break when you put money into a Roth account, the money grows tax-free and is never taxed again if distributions are made properly. This is BIG!! Now, you will have to pay taxes on the roll over funds, but this may still be a smart move. Tax rates are low, and the value of many accounts has been artificially depressed by the downturn. Paying tax on the rollover now could save you if tax rates go up or if your account recovers its value.
And starting this year, the $100,000 AGI limit on these rollovers is lifted. This means that even you high-income taxpayers can convert your retirement accounts this year.
Since you will be required to pay tax on the converted amount you will need to plan accordingly. For 2010 only, you can elect to pay all of the tax for your 2010 taxable year or pay half of the tax with your 2010 return and half with your 2011 return. Usually you must pay all of the taxes in the year of the roll over.
Consider a retirement plan.
It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the Internal Revenue Code. Contributions reduce taxable income at the time you make them, and you don’t pay taxes until you take the money out at retirement. The 2010 contribution limits are $16,500 for a 401(k) and $5,000 for an IRA (not including catch-up contributions for those 50 and older). Remember that contributions to your IRA can be made as late as April 15, 2011. Regardless of whether tax rates go up, it almost always makes sense to put as much money into tax-favored retirement vehicles as you can.
It's wise to discuss the wide range of plan options with a CPA or other financial adviser. Some of these plans must be set up by December 31 even if they don't have to be funded until the due date of your extended return.
Review your health coverage.
Business owners (excluding those with a C corporation) who pay for their health coverage can deduct it, but only as a personal expense, not a business expense. However, for 2010, if you are self-employed you can use the premiums to offset the amount of net earnings used to calculate self-employment taxes. You may want to pre-pay your 2011 premiums to boost your 2010 offset to save even more on self-employment taxes.
If the insurance qualifies as a high-deductible health plan, then you're allowed a tax-deductible contribution to a Health Savings Account for 2010. (To be considered “high deductible” in 2010, the policy's deductible must be at least $1,200 for individuals and $2,400 for families and meet certain other tests.)
Consider charitable contributions.
If you've had a good year you can share your good fortune with charities. The donations are tax-deductible within the limits allowed by the Internal Revenue Code. For example,
Let me explain.
If you own a C Corporation or an LLC electing C Corporation tax status, your charitable deductions are limited to 10% of taxable income.
If you report your business income on personal tax returns (such as sole proprietors, or owners of S corporations or limited liability companies) your deductions will be reported on your personal 1040.
Now, there is a big change for 2010: There's no phase-out of itemized deductions for you high-income taxpayers. That's a shift from prior years, when you lost part of your charitable deductions when your income exceeded a threshold amount.
Now, one last point: Most of my year end tax moves have always included strategies such as deferring income and accelerating deductions. You're probably familiar with those. But this year is different. I'm waiting to see what happens with the “agreement in principle” before making any of those moves. And I'll be sure to keep you updated. Hopefully there will still be enough time to act.
Until next time, thanks for reading BillOnBusiness.net! Your comments and questions are welcomed below.