Tax Saving Strategies
for 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
$33,750
> Married/Joint/Qualifying Widow(er) $45,000
> Married/Filing Separately
$22,500
As of mid-December, Congress is
considering an AMT Patch for 2010.
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© 2011 American Institute of CPAs
Estate Tax
> No estate tax for those deceased in 2010
> Carryover basis and step-up basis for certain inherited assets
> Returns in 2011
> No change in gift tax in 2010 (annual exclusion $13,000)
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© 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
*MAGI
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© 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
*MAGI
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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
*MAGI
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© 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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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
> 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
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© 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
Earned Income Credit
Family Size
Maximum Credit
Three or More Children
$5,666
Two Children
$5,036
One Child
$3,050
No Children
$457
Phaseout rules apply
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© 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
> Tax Credits
> Lifetime Learning Credit
> Student Loan Deduction
> Higher Education Tuition and Fees Deduction
> 529 Plans
> Prepaid Tuition Plans
> U.S. Savings Bonds
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© 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)
*Pertains to MAGI
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© 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)
*MAGI
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© 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
*MAGI
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© 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)
*MAGI
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© 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
> Deductions
> Selling Your Home
> New Energy Incentives
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© 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
> 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
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© 2011 American Institute of CPAs
Inherited IRA
> Taxable distributions to beneficiaries
> Exceptions apply
> 10% early distribution penalty not applicable
to 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.
© 2011 American Institute of CPAs