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Thread: 2010 Tax Planning ... lots of potential issues to consider ...

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    Banned Melonie's Avatar
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    Default 2010 Tax Planning ... lots of potential issues to consider ...

    ... beginning with full time dancers potentially being subjected to the Alternative Minimum Tax in 2010 ...

    (snip)"Neal said the Ways and Means panel likely will defer extending a so-called “patch” of the alternative minimum tax that spares about 30 million households from paying about $70 billion in higher income taxes this year. Congress would have to extend the patch in 2010 to keep the higher taxes from taking effect then. "(snip)

    from

    (snip)Under current law [which will again take effect if no new AMT 'patch' is passed by the US congress - sic], AMT coverage will skyrocket. By 2010, the AMT will affect 33 million taxpayers—about one-third of all tax returns—up from 1 million in 1999. This would make the AMT almost as common as the mortgage interest deduction is today. The AMT will be the de facto tax system for households with income between $100,000 and $500,000, 93 percent of whom will face the tax. It will encroach dramatically on the middle class, affecting 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to less than 3 percent for each group in 2002). (snip)

    from


    If you are not familiar with the AMT, in essence it is an 'overriding' tax rate that begins to disallow tax deductions as income levels increase. This has the effect of increasing 'real world' US federal income tax rates for people living / working in high tax rate states, for people with large deductible expenses ( like home mortgage interest ), etc. The 2008 US congress passed an AMT 'patch' which raised the 2009 annual income threshold over which the AMT starts to apply to $ 46,200 for single filers. If the current US congress does not pass a new 'patch', the 2010 annual income threshold over which the AMT would start to apply will be reduced to $ 35,750 for single filers ( as originally set in the original 1969 law ... when $35,750 was considered a LOT of income ).

    With these latest indications that a 2010 AMT 'patch' is not likely to be passed, this generally means that full time dancers may be subjected to significantly higher 'real world' tax rates in 2010 than they are for 2009. From a tax planning standpoint, the remaining weeks before the end of December provide an opportunity to 'realize' income under lower 2009 income tax rates, as well as to 'exercise' transactions that would result in large tax deductions that are more likely to be fully allowed under 2009's AMT 'patch'.


    - this might be a good time to consider selling off some of your investments that have been accumulating as-yet 'unrealized' capital gain income. Even if you turn right around and reinvest the proceeds into similar investments, at least you'll be booking past years' 'unrealized' income at tax rates that are likely to be significantly lower than in future years.


    - for dancers living and working in low tax rate states, who claim state and local sales taxes in lieu of claiming state and local income taxes, if you are considering a major purchase in 2010 ( that would result in a large sales tax deduction ), you may want to consider advancing that purchase into 2009 so that the 'full value' of corresponding sales tax deduction can be used to reduce 2009 tax liabilities.


    - for dancers who will earn less than the $100,000 exclusionary limit in 2009, and who have a 'tax deferred' gov't sanctioned retirement account i.e. an IRA, SEP IRA, 401k etc., you may want to consider converting your 'tax deferred' account to a Roth IRA before the end of 2009. The reason of course is that money withdrawn from a 'tax deferred' account counts as additional taxable income at the time of withdrawl, whereas money withdrawn from Roth IRA's is NOT taxable. As such, booking additional income from a 2009 conversion is likely to result in significantly lower tax consequences than performing a similar conversion in future years - or not converting your 'tax deferred' account thus having to pay higher future tax rates on withdrawn money ( and / or sacrifice gov't retirement benefit eligibility ) when you reach retirement age. Given that this issue is complex, you may want to look at for more specific information.

    ~
    Last edited by Melonie; 11-21-2009 at 06:03 AM.

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    Featured Member Laurisa's Avatar
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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    A useful post about the AMT from Melonie in one of my threads from like two weeks ago.

    http://forum.stripperweb.com/showpos...1&postcount=26
    If you are willing to do for one year what other's won't, you can spend a lifetime doing what other's cant.


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    Banned Melonie's Avatar
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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    With the US senate successfully voting to debate 'national health care', and with a track record of 97% of past successful debate votes resulting in passage of new legislation, it would appear that US 'national health care' ... and its associated tax increases ... will become a reality for next year. Thus there are now new considerations for 2010 tax planning.


    - if you have been considering plastic surgery, botox injections etc., you may want to seriously consider advancing your appointment date into 2009. Doing so would avoid having to pay both a new 5% surtax on cosmetic procedures, and also avoid having to pay increased prices for the actual breast implants / botox etc. that will become subject to a new 'stealth' tax on medical device manufacturers.


    - if you have been considering relocation out of a high tax rate state, you may want to seriously consider advancing your relocation schedule. The reason for increased urgency is that a major consequence of any 'national health care' bill will be decreased federal reimbursements for health care costs, which in turn will increase health care costs borne by state and local budgets ... plus expanded eligibility for medicaid, that will further increase health care costs borne by state and local budgets. This will create additional pressure for state and local income tax rates / sales tax rates / property tax rates to be increased in 2010.


    - if you do live in a high tax rate state, and plan on remaining there, you may want to consider 'rotating' some of your investments into federal / state / local tax free municipal bonds ( or mutual funds consisting of such bonds - see for one such example ) before the end of 2009. As federal, state and local tax rates increase, the 'value' of the tax free interest income provided by such muni bonds / muni bond funds also increases. Also, the additional 'national health care' surtax on high income earners ( >$200k per year in the Senate bill ) is likely to stimulate increased purchases of muni bonds by those high income earners ... which may provide the potential for capital gains on such muni bonds / muni bond funds for buyers that get in 'early'.


    - if you currently have a gov't sanctioned tax deferred 'Health Savings Account', you may want to consider withdrawing the money and closing the account before the end of 2009. The reason for this is that the current 10% penalty for withdrawl of HSA funds for non-medical reasons will increase to 20% in 2010 under the Senate bill. Additionally, under the Senate bill provisions, use of HSA's will no longer be allowed for the purchase of 'non-prescription' goods i.e. over the counter drugs and medical items - which will typically make them far less advantageous for younger persons.

    ~
    Last edited by Melonie; 11-22-2009 at 12:16 PM.

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    Veteran Member Lola_sinn's Avatar
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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    Which states have high/low tax rates?

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    Quote Originally Posted by Lola_sinn View Post
    Which states have high/low tax rates?
    For example, Texas, Florida and New Hampshire have no state income tax, although they do have state sales taxes and property taxes. California with relatively low property tax rates has very high income tax rates. New York has relatively high income tax rates.

    HTH
    Z

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    there's a very easy to use 'tax map' at that shows the income tax rate structure for every state.

    Note that in addition to state income taxes, there are a number of cities that also impose a city income tax in addition to the state income tax. The ones I'm most familiar with are New York City, which imposes a 2-3% city income tax on all income earned within the city limits ( regardless of the official residency of the person earning the money ) on top of the 5-7% NY state income tax - and Philadelphia, which imposes a 1.5% city income tax in addition to the 3% PA state income tax.

    Connecting back to earlier points in this thread, between proposed changes in federal income taxes and already enacted changes in state and city income taxes, plus existing self-employment taxes ( = Social Security / medicare tax ), a full time dancer working in Manhattan, for example, now faces the prospect of a combined 2010 effective income tax rate above 45%. In comparison, a full time dancer working in Dallas, for example, would face a combined 2010 effective income tax rate around 35% ( i.e. federal only ).

    It also probably bears mentioning that income tax rates are progressive relative to total annual earnings. Put another way, given the existance of personal exemptions and standard deductions, in general the first $30,000 per year that a dancer earns is taxed at a very low effective tax rate. If a dancer works more nights per week and her income rises to say $50,000, this additional money earned is taxed at a higher rate. If a dancer works yet more nights per week and her income rises to say $75,000, this additional money earned is taxed at a very high rate. And the latter is particularly the case if the last 'marginal' dollars earned triggers the application of the Alternative Minimum Tax to ALL dollars earned above $35,750 per year in 2010.

    As such, it might make sense for high earning full time dancers to take a lesson from NY businessmen and seriously re-evaluate whether or not working that fifth night per week in 2010 is actually still 'worth it'. From a marginal standpoint, the money earned on that fifth night may result in 50%+ of all dollars earned that fifth night going towards income taxes. In addition, the relative effort required on the dancer's part for every dollar earned during that fifth night will be the highest ( i.e. working a monday or tuesday typically doesn't compare to working other nights of the week in terms of earnings potential ). Also, generally speaking, the 'costs' associated with working that fifth night will be the highest relative to earnings potential ( i.e. costs of gas / tolls / paying a babysitter etc. are the same on a monday or a friday but earnings potential is significantly lower on monday than on friday).

    Thus, like the NY businessmen, you may find that putting forth the extra effort to work a fifth night per week in 2010 may in fact be a comparative 'waste' of effort in terms of actual additional after-tax, after-expenses, net income potential. The case for this is even stronger if working a fifth night will wind up triggering the AMT - which in turn could significantly increase the effective tax rate that would apply to your earnings from one or two other nights already worked that week ( which is the mechanism by which the de-facto marginal tax rate for the fifth night could exceed 50% of dollars earned )! This might be a very important discussion to have with your accountant, especially if your expected 2010 annual dancing income is likely to fall in the $75,000+ range!



    ~
    Last edited by Melonie; 11-22-2009 at 10:01 PM.

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    Here's a case where the FAILURE to change tax laws which might offer a comparatively tax advantaged investment opportunity ... specifically, the failure of the US congress to change the ( GWB tax cut left-over ) 15% maximum tax on 'qualified dividend' income which remains in effect through 2010.

    - if your annual income for 2010 will put you in a 30%+ marginal tax bracket, such that additional dollars of 'ordinary income' will be taxed at 30%+, you can cut some of your investment tax liability in half by 'rotating' some of your fully taxable interest bearing investments ( like bank CD's which are paying next to nothing in terms of current interest rates ) into stock shares that pay high levels of 'qualified dividends'. This typically means investing in large 'stable' corporations, such as power companies or telecom companies or consumer staple companies ... or investing in mutual funds that consist of shares in such companies.

    offers insight and specifics

    As with all equities, purchasing high dividend paying stock shares in large 'stable' companies carries with it a potential loss of principal, which is not the case for FDIC insured bank CD's. So don't consider 'cashing in' your emergency fund !

    I will also point out that, as stated by many sources in the US congress, the final remains of the GWB tax cuts will be allowed to expire in 2010. As such, the current 15% maximum tax rate on 'qualified dividend' income will revert to the 'ordinary' income tax rates of 30%+ in 2011. As such, this dividend stock play is definitely a 'short term' option. However, if these dividend stock shares are purchased prior to the end of 2009, and sold after being held for 366+ days but still before the end of 2010, the potential exists to achieve a 15% maximum tax rate on dividend earnings plus a 15% tax rate on any long term capital gains.

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    Quote Originally Posted by Melonie View Post


    - if you currently have a gov't sanctioned tax deferred 'Health Savings Account', you may want to consider withdrawing the money and closing the account before the end of 2009. The reason for this is that the current 10% penalty for withdrawl of HSA funds for non-medical reasons will increase to 20% in 2010 under the Senate bill. Additionally, under the Senate bill provisions, use of HSA's will no longer be allowed for the purchase of 'non-prescription' goods i.e. over the counter drugs and medical items - which will typically make them far less advantageous for younger persons.

    ~
    Lame about the non-prescription goods. But HSA's rollover, and eventually, most people will have some medical need to use the money. Its still a tax shelter for qualified expenses. Unless you have a ton of money in your HSA and none in the bank...may not want to risk the penalty.

    Although...its a gamble at this point.

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    Quote Originally Posted by Melonie View Post

    I will also point out that, as stated by many sources in the US congress, the final remains of the GWB tax cuts will be allowed to expire in 2010. As such, the current 15% maximum tax rate on 'qualified dividend' income will revert to the 'ordinary' income tax rates of 30%+ in 2011. As such, this dividend stock play is definitely a 'short term' option. However, if these dividend stock shares are purchased prior to the end of 2009, and sold after being held for 366+ days but still before the end of 2010, the potential exists to achieve a 15% maximum tax rate on dividend earnings plus a 15% tax rate on any long term capital gains.
    For sure. Do you think this thinking might be responsible for the smaller rallys of these past few months?

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    For sure. Do you think this thinking might be responsible for the smaller rallys of these past few months
    doubtful ! The reasoning behind this conclusion is that stocks owned by foreign investors, by hedge funds, by 401k and IRA account holders etc. are not directly subject to US cap gains tax or US tax on dividends.

    On the other hand, the coming tax increases at the end of 2010 could indeed provide stronger motivation to sell before the end of 2010 !


    But HSA's rollover, and eventually, most people will have some medical need to use the money. Its still a tax shelter for qualified expenses
    This is speculative right now, but if US National Health Care becomes a reality, Americans will be forced to purchase 'qualified' health insurance by one mechanism or another ... which would effectively end the availability of low premium but high deductible catastrophic coverage only health insurance ( which would not 'qualify' ) being used in conjunction with HSA 'self-paid' high deductibles and out-of-pocket medical costs that the castrophic coverage only insurance does not cover. If you combine the lower deductibles and the expanded areas of coverage of future 'qualified' health insurance with the inability to use HSA money for 'over the counter' drugs and medical products, the future 'qualified uses' for HSA money would be significantly reduced.

    Combining this with a doubling of the future HSA penalty from 10% to 20% for 'non-qualified' withdrawls, and the 'lost opportunity cost' of unspent HSA money earning very little interest while remaining 'parked' in an HSA account, it certainly changes the question of starting / keeping an HSA account beyond the end of 2009 from the former 'no-brainer' to a 'calculated risk'. In fact, my NY accountant is already running simulations of what would happen in the future if his clients chose to reject the purchase of 'qualified' health insurance coverage altogether, instead elected to pay the new IRS penalty for not being insured, but to expand their HSA balance to the point of being able to cover a greater amount of health care costs out of pocket. But without the future availability of catastrophic only health insurance to 'cap' potential out of pocket health care costs, and with future limits on annual HSA contributions remaining in place, this scenario appears to carry significant risk of being financially 'wiped out' if a catastrophic level health problem were to develop and if the clients' other financial assets were still residing within the USA and thus subject to forced 'liquidation' in satisfaction of uninsured catastrophic medical expenses.

    ~
    Last edited by Melonie; 11-25-2009 at 01:41 AM.

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    That's too bad catastrophic coverage plus HSA was a really good option for a lot of middle class, self-employed people, its easier to get covered for catastrophic versus full-coverage health insurance. And HSA is (was?) a decent tax-shelter for a couple of grand...basically, something beneficial for us middle-class earning folk, as $2,500 is pocket change for the rich, and n/a to the poor, who already have full government benefits. I loved my HSA when I had it.

    In my perfect world, that type of coverage would be expanded, on the part of insurance companies, in lieu of required government healthcare and penalties for opting out.

    I still like a public option for those of us making too much for Medicaid, too young for Medicare, and cannot afford standard private health insurance due to medical conditions. It would be a significantly smaller tax for americans overall.


    /end threadjack

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    Default Re: 2010 Tax Planning ... lots of potential issues to consider ...

    here's another 'sneaker' ... which applies to taxes on investments in both physical commodities and Exchange Traded Funds which consist of commodities. This obviously brings to mind gold and silver, but actually applies to oil, natural gas, wheat, etc. And while very few Dollar Den readers may invest in physical oil, gas, wheat, etc. they may still be affected if they have invested in ETF's that consist entirely of such commodities.



    (snip)"Unbeknownst to most investors, gold is [ now - sic ] considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.

    This is no small distinction, and it hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.

    Precious metals are a completely different story. Profits from these "investments" can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.

    The long and the short of it "is that as a result of gold's spectacular run-up, many investors may have a tax problem they haven't counted on when they go to sell," said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC.

    This may be especially true for investors who have piled into such asset-backed ETFs as the SPDR Gold Trust (GLD), the iShares Silver Trust (SLV) and the iShares COMEX Gold Trust (IAU), for example, because precious metals ETFs are set up as something called a "grantor trust."

    According to Barron's, ETF investors are treated as owning undivided interests in the actual metal that's owned by the fund. Therefore, when an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund."(snip)


    (snip)" What is a collectible?

    What is a "collectible?" Of course, collectibles include stamps and coins, fine wines, glassware, and other commonly collected items.

    It’s important to keep in mind that less obvious items are often "collectibles." For example, a collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.

    Higher tax rate

    Traditionally, collectibles have been taxed at a high capital gains rate because of public policy arguments. Supporters of high capital gains tax rates for collectibles justify their position by the lack of broader benefits, such as innovation, new products and higher productivity, that society receives from collectibles. On the other hand, society benefits from the preservation of works of art, antiques and many other collectibles.

    Currently, the [ long term - sic ] capital gains tax rate for collectibles is 28 percent. This is significantly higher than the capital gains tax rate for stocks, securities and many other investments, which enjoy a 15 percent capital gains tax rate (five percent for taxpayers in the 10 or 15 percent tax brackets)."(snip)

    from

    Ironically, for the 'rich', having to pay a maximum 28% tax rate on an investment in 'collectables' may actually be significantly cheaper than having to pay a 33-36-39.6% tax rate on 'regular income'. In fact, this differential between the 2010 probable tax rates on gold coins in a bank safe deposit box versus cash in a bank CD now arguably favors the gold coins ! This may actually explain why gold hit $1200 an ounce today !

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