The following are five prime examples:
1. Postpone tax on a Roth conversion. For the first time, taxpayers could convert funds in a traditional IRA to a Roth, regardless of their income. Previously, conversions were not allowed for anyone with an adjusted gross income above $100,000. When it is appropriate for you, pay the conversion tax over the following two years. In this case, the taxable income is split evenly between 2011 and 2012. The tax deferral option is only available for 2010 conversions. Conversions after 2010 are taxed in the year converted.
2. Supersize state tax deductions. Instead of deducting state income tax, you can elect to write off the state sales tax paid during this year. This optional tax deduction, which had expired after 2009, was retroactively reinstated for the 2010 tax year by the Tax Relief Act. The provision on state sales tax is now scheduled to expire after 2011. Compare both state taxes and deduct the higher of the two. The state income tax deduction may still produce a bigger deduction for taxpayers in states with high income tax rates.
3. Turn stock lemons into tax lemonade. Those who were among the millions who lost money in the market downturn of 2008-2009 may have incurred an excess loss that was carried over. Now it is time to reap the tax rewards. Use the excess loss to offset last year’s capital gains. For instance, if you cashed in stock winners in 2010, the gains are effectively tax-free up to the amount of the loss. You can use any remaining loss—counting the prior loss and any other capital losses from 2010—to offset up to $3,000 of highly-taxed ordinary income, such as wages.
4. Avoid double tax hit on mutual fund gains. With the stock market recovering last year, investors may have sold some mutual fund shares at a significant gain. Adjust your tax basis accordingly. Typically, if you have been automatically reinvesting dividends, the reinvestments can be added to your basis. This reduces the tax due on the sale.
5. Get tax comfort from home improvements. If you made certain improvements to your home last year—maybe insulating windows and doors or buying a new central air conditioning system—you probably reduced heating and cooling costs. But that is not the only savings that may be realized. Recoup some of the cost of energy-saving improvements on a 2010 return. If you qualify, you can claim a “residential energy credit” of up to $1,500.
These are just five possible ways to lower your 2010 tax bill. To discuss your personal situation, call your Tax Consultant. We will be happy to schedule a meeting during tax filing season.