taxstrategy
BY GEORGE G. JONES AND MARK A. LUSCOMBE
2010 year-end tax
planning: Deductions
and do-overs
DEDUCTION/CREDIT PLANNING
Three aspects to maximizing the benefits of
deductions and credits are particularly rel-
evant at year end:
Identification of opportunities for deduc-
tions and credits in the current year before
they are lost;
Assessment of strategies to maximize the
value of deductions and credits by either ac-
celerating or postponing them; and,
Execution of a plan that will ensure
claiming the deduction or credits in the year
intended.
If you miss
taking
advantage
of a
deduction
or credit
one year,
many
prohibit
you from
trying again
next year.
“
”
Only a handful of days remain to ex- ecute year-end tax strategies. Some techniques for this year reprise traditional advice that has legs year after year,
while others, including reaction to whatever
this year’s lame-duck Congress has wrought,
have a unique sense of urgency.
In a recent column, we focused on year-end tax planning strategies that accelerate
or defer the recognition of gross income,
use of which depends upon each taxpayer’s
present and anticipated tax bracket. This column examines the other side to the goal of
lowering overall tax liability between 2010
and 2011: using deductions and credits efficiently. We also cover two “hot” topics for
2010 that have year-end tax planning implications in their own right: Roth conversions
and rescissions.
do not both purchase and install qualifying
equipment by year-end 2010.
Depending upon what Congress has done
between the writing of this article in November and its publication, the latter category
of use-it-or-lose-it deductions and credits
may include a number of additional “
expiring provisions” that will not be available in
2011. This list may include, on the individual
side, the itemized state and local sales tax
deduction, the additional standard deduction for real property taxes, the deduction
for qualified tuition/expenses, the deduction
for teacher classroom expenses, and tax-free
distributions from IRAs for charitable purposes in lieu of a direct itemized charitable
deduction. On the business side looms the
research credit that officially expired at the
end of 2009. Notable, too, the Making Work
Pay Credit of up to $400 ($800 for joint returns) also may end in 2010 without further
congressional action.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA,
is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
IDENTIFICATION
Most deductions and credits are available on
a per-calendar-year basis only. Furthermore,
if you miss taking maximum advantage of
them in one tax year, many prohibit you from
trying again next year by adding that amount
to next year’s cap. The maximum $16,500
contribution level for 401(k) contributions,
for example, cannot be doubled to $33,000 in
2010 for the taxpayer who made no contribution for the 2009 tax year.
Even more extreme, perhaps, are those deductions or credits that are temporary and
end in 2010. For example, the consumer energy credit of $1,500 available over the 2009
and 2010 tax years will be lost to those who
MAXIMIZING DEDUCTIONS
Two initial questions should come into play
in maximizing any deduction that may other wise be available:
1. Is the deduction restricted by the taxpayer’s adjusted gross income level or other
ceiling or floor?
2. Given the taxpayer’s anticipated income
tax bracket in 2010 as compared to 2011, in
which year will the deduction reduce a greater dollar amount of tax?
Although raising deductions in one year
by deferring a disqualifying amount of AGI is
an available technique, its use independent
of any difference in the taxpayer’s effective
tax rates for the ending and upcoming years
generally puts the cart before the horse. For
those who will be in a higher rate bracket
in 2011 than in 2010, whether because of a
greater level of anticipated income or by act
of Congress (at press time, the final individual
income tax rates for 2011 had not yet been
set by Congress), deferring deductions into
2011, rather than maximizing them in 2010
by lowering 2010 AGI, generally makes the
most sense.
If a taxpayer’s marginal rates for both 2010
and 2011 are equal, however, deferring income to lower 2010 adjusted gross income
enough to qualify for a particular deduction
or credit not otherwise available in 2010 is a
strategy worth investigating. High on the list
of AGI ceilings are education credits and deductions and the adoption expense credit, as
well as certain IRA contribution levels. On the
flip side, certain other deductions can sometimes increase as AGI decreases because of
AGI floors associated with them. This group
includes medical expense deductions, casualty loss deductions and miscellaneous itemized deductions.
Another twist that may be peculiar to 2010
year-end planning is, again, dependent upon
what the lame-duck Congress may decide.
Although for the first time since the late 1980s
the 2010 tax year will see no reduction whatsoever in total itemized deductions based on
income, the reprieve will be short-lived if the
EGTRRA sunset takes its course and the so-called Pease deduction returns in full force
in 2011. In shifting deductions into or out of
2011 this December, therefore, practitioners
should confirm the current state of a possible
renewed Pease deduction that would lower
the available amount of certain 2011 itemized deductions.
2010 LEGISLATION
In constructing a comprehensive year-end
strategy, those deductions that are new for
2010 also should not be overlooked. Since
most of them are also temporary, with many
expiring at year-end 2010, decisive year-end
action may be needed.
The Small Business Jobs Act of 2010 extended bonus depreciation through 2010;
doubled Code Section 179 expensing through
2011; raised to 100 percent the exclusion for
gain on qualified small-business stock acquired from Sept. 27 through Dec. 31, 2010;
further relaxed the S corp built-in gain conversion rules for dispositions of built-in gain
property starting in 2011; extended the car-ryback period to five years for eligible small-business credits in the first tax year starting
after Dec. 31, 2009; enhanced the deduction
See STRATEGY on
20
