by Ryan McKeown, CPA, CFP®, Vice-President Financial Advisor, Wealth Enhancement Group

Along with starting a brand new calendar year, we also start a new tax year. While most of the opportunities to take action for your 2009 tax return, other than preparing it, have passed, it’s not too early to start thinking ahead for 2010. As always, we recommend that your visit with your financial advisor or tax professional to make sure these strategies make sense for your situation and overall financial plan. Here are our top ten tax opportunities for 2010:  

1. Convert to a Roth IRA. 2010 is the first year for those with “modified adjusted gross income” exceeding $100,000 to be able to convert from a traditional IRA or qualified retirement plan to a Roth IRA. Also, the tax on conversions in 2010 is payable one-half in 2011, and one-half in 2012. However, the tax is based on 2011 and 2012 income and income tax rates, which may be higher than what they are now. Not to worry, if it makes sense to pay the tax on the conversion in 2010, you can elect to do so.
   
   
2. Take advantage of low capital gains rates. 2010 might be the last year to enjoy favorable long term capital gains rates. The 15% and zero rates for those in the 10% or 15% tax bracket are set to expire at the end of 2010. If you own appreciated assets and want to “lock in” these currently low tax rates, you may want to start planning to sell them earlier rather than later.
   
   
3. Buy a house. If you enter into a contract to purchase a house by April 30th and close on that house by July 1st, you could be eligible a tax credit of up to $8,000 for qualified first time homebuyers, or $6,500 for qualified existing homebuyers.
   
   
4. Make your existing house more efficient. On the first $5,000 of qualifying energy efficient improvements (windows, doors, furnaces, etc) for your primary residence, you can receive a credit of 30%, or $1,500. On certain improvements, such as geothermal systems, the $5,000 limit is lifted and the credit is based on the entire purchase amount. The credit is only based on the cost of the materials, not the labor. Check www.energystar.gov to see if your purchase qualifies.
   
   
5. Get educated. The American Opportunity credit can be used for the first four years of higher education, good through 2010. The credit is based on 100% of the first $2,000 of eligible higher education expenses, and 25% of the second $2,000, for a total of $2,500 on the first $4,000 spent. More families are now eligible for this credit than other education credits due to expanded income limits, as well as the credit now being 40% refundable.
   
   
6. No phase-out of itemized deductions. Prior to 2010, those individuals and families with higher incomes were not able to deduct all of their itemized deductions (charitable contributions, state income taxes, etc.) due to income phase-outs. In 2010 only, that phase-out goes away, providing an opportunity for higher income earners to better maximize their deductions. Beware of certain deductions, such as state income taxes, that still get added back to income for “Alternative Minimum Tax.”   
   
   
7. Shift income to family members. If you have family members who are in lower tax brackets, consider gifting appreciated assets to them to sell at lower rates (see #2-taking advantage of low capital gains rates). There are special limits how much income you can shift to children and students age 23 and younger.
   
   
8. Maximize retirement plan contributions. Retirement plan contribution limits are staying the same for 2010 as in 2009. You can contribute up to $16,500 to 401(k), 403(b), 457, and SARSEP plans ($22,000 if age 50 or older). The limit is $5,000 for Traditional or Roth IRAs ($6,000 is age 50 or older).
   
   
9. Make IRA contributions early. The sooner you make your contributions, the sooner more tax-deferred income in a Traditional IRA or tax-free income in a Roth IRA can accrue.
   
   
10. Strategically plan retirement plan withdrawals. Meet with your tax professional or financial advisor to make sure you aren’t taking out more than you should (unnecessarily putting yourself in a higher tax bracket), or taking out too little (and not taking advantage of withdrawing at lower tax rates). 

While we certainly don’t know what our investments will do day to day, you can carefully plan your taxes to make sure you are taking advantage of available benefits.