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Aspen, CO 81611

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Year End Planning 2010: Not for the Faint of Heart

The proposed compromise between the President and Congressional Republicans may actually happen. If it does, it will obviously be at the very last minute to allow for year end planning. But, there will still be time to take advantage of the tax provisions that will most likely be part of this package. Some of the key provisions are listed below.

• Maximum income tax rates for individuals would stay at 35% (instead of increasing to 39.6%).
• The preferential rates on qualifying dividend income and capital gains would remain at 15%.
• Estate taxes, which are scheduled to return in 2011 with a $1 million exemption level and a top rate of 55%, would return with an exemption level of $5 million and a top estate tax rate of 35%. This one provision, however, is being debated in the House version. Stay tuned.
• There would be a payroll tax holiday equal to 2 percentage points next year, so instead of paying 6.2% on their first $106,800 of wages, workers will only have to pay 4.2%.
• Also included is a temporary provision allowing businesses to write off 100% of their asset purchases made in 2011. This has been limited in the past.
• Two other provisions that would also be extended: (1) 15–year write–off for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements; and (2) the work opportunity tax credit.
• Many tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including: the provision permitting tax–free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010); and, in addition, the bill will extend for an additional year (i.e., through 2011), the rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest.
• The research and development credit will be renewed and extended through 2011.

Year End Planning if the Proposal is Passed

Even if the proposal passes late in the year, there will still be time to identify specific actions that you can take to benefit from the new law. The following is a partial list of general planning ideas. Contact us at your earliest convenience so that we can advise you on the specific tax–saving moves to fit your situation.

• Postpone income until 2011 and accelerate deductions into 2010 to lower your 2010 tax bill. Note, however, that in some cases it may be beneficial to actually accelerate income into 2010. Let us design a plan to determine if this works for you.
• Consider converting your traditional IRA to a Roth IRA in 2010. There is a unique opportunity to make this conversion to a Roth IRA in 2010 without being limited due to your adjusted gross income.
• Consider using a credit card to prepay expenses to generate deductions for the current year.
• Consider paying any estimated state and local income taxes before year end by asking your employer to increase withholding on your payroll. Alternatively, you could make an estimated tax payment of state and local taxes before year–end to generate a 2010 deduction. We will, however, need to analyze whether doing so would create an alternative minimum tax (AMT) problem.
• And, of course, we should estimate the effect of any year–end planning moves on the AMT for 2010. Many deductions allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. This requires us to perform a thorough analysis so that the AMT is avoided.
• You may be able to save taxes by utilizing a “bunching” strategy with regard to your miscellaneous itemized deductions, medical expenses, and certain other itemized deductions.
• Businesses should consider making expenditures that qualify for the business property expensing option, for assets bought and placed in service this year. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year.
• If you are self–employed and haven't done so yet, set up a self–employed retirement plan.
• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion ($13,000 for 2010) before the end of the year.
• Consider disposing of any passive activity (i.e. limited partnership interests, etc.) to allow you to deduct all suspended losses.

These are just some of the year end steps that can be taken to reduce taxes. Contact us now so we can design a plan that is tailored to your situation.

As always, we look forward to hearing from you.




Reese Henry & Company, Inc.
400 East Main Street Aspen, CO 81611
970.925 3771

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