Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.
A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010).
In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:
- Marriage penalty relief
- Repeal of the itemized deduction and personal exemption phaseouts
- Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
- Mortgage insurance premium deduction
- Above-the-line deduction for certain out-of-pocket classroom expenses
- Above-the-line higher education tuition deduction and other education-related incentives
- Alternative minimum tax (AMT) patch
- Nonrefundable tax credit offset of entire regular and AMT tax liability
- Tax-free IRA distributions to charity
However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.
Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.
Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.