The More Things Change, the More They Stay the Same
A variety of tax provisions that expired at the end of 2009 were re-enacted late in 2010, retroactive to the beginning of the year. These tax-saving opportunities include:

• You may choose to deduct state or local sales tax from your federal return instead of state or local income tax. This can benefit taxpayers living in states with no income tax as well as those living in states where social security or pension income is largely protected from taxes.
• The tuition-and-fees deduction may let you deduct up to $4,000 for college tuition and fees for yourself, a spouse or a dependent. You may claim this break even if you don’t itemize (see Form 8917 and instructions for details).

Enjoy Select Tax Provisions While They Last

While some expired tax provisions were revived late in 2010, others scheduled to expire at the end of the year were given new life – albeit temporarily.

• The lower tax rates on individuals, including ordinary income and capital gain rates, were extended for two years through 2012. Dividends will continue to receive preferential tax treatment as well.
• The larger credits for children and for dependent care expenses were also extended.
• Relief from the marriage penalty – the loophole that caused married couples to pay more tax than two single people making the same income – will continue to be available, although only through 2012.

Special Considerations for Retirement Accounts

Typically, April 15 is also the deadline to make contributions to your regular IRA for the purposes of a previous year’s tax deduction. For your 2010 taxes, that deadline has shifted to April 18. There are some other considerations for account holders this year:

• If you took advantage of the Roth conversion opportunity in 2010, you will need to decide by the time you file your tax return whether you want to pay the entire tax bill on your conversion this year or spread it out over your 2011 and 2012 tax bills.
• If you turned age 70½ in 2010, you must take your first required minimum distribution by April 1, 2011. This will be your 2010 distribution, and you will need to take another before the end of the calendar year for 2011.

Don’t Forget to Harvest Past Losses

As in years past, there are several best practices as it relates to tax planning that you should remain mindful of in in 2011.

• Although the stock market has been kind to most investors since March of 2009, many portfolios still haven’t fully recovered from losses suffered during the downturn. If those losses exceeded the allowable maximums in the years they were incurred, they can be used to offset this year’s investment gains or other income. Note that you cannot use realized losses in tax-deferred accounts to offset gains in taxable accounts.
• The IRS audit rate for individual returns reached 1.11 percent in fiscal 2010, the highest level in 10 years. This figure includes audits of 3.1 percent of returns from taxpayers with annual incomes exceeding $200,000 and 8.36 percent of Americans reporting more than $1 million of income – a record number for this bracket. Wealthy filers should triple-check everything for omissions and inaccurate numbers, particularly regarding items that are easy for the IRS to verify, such as items reported on W-2s, 1099s, etc.

Make use of the time you have to prepare your return thoroughly. A Financial Advisor who understands your unique situation can help you navigate many of the special considerations related to your investment portfolio this tax season. Also, especially if you qualify as a “higherincome” filer, we encourage you to hire a professional tax advisor to review your return.