The Vaughn / McLaughlin Team | Crystal River, FL

The Importance of Tax Planning

Careful planning throughout the year can assist you in reducing the taxes you pay - as well as help you achieve your financial goals. This brief guide provides a basic overview of some of the tax rates, credits, deductions and related considerations that may apply to you.

Income tax planning should not be done in isolation, but instead should be driven by your overall financial goals and integrated with your total financial plan. By developing and implementing appropriate strategies to lessen or shift current and/or future tax liabilities, you can improve your prospects of meeting both long- and short-term objectives. For example, accurately projecting your income taxes can help you determine the cash flow available to you in the coming year.

Keep in mind that tax laws are often complex and frequently change. As a consequence, you should be sure to consult the appropriate professional before making investment and/or tax decisions.

Year-End Considerations

While year-round tax planning is important, you may find extra benefits by gathering all your tax-related facts as the year ends. You may, for example, have a clearer picture of your capital gains and losses, as many mutual fund companies issue distribution estimates by mid-December. The end of the year is a fine time to:

Examine your portfolio's asset allocation
Rebalance your portfolio, if warranted
Assess holdings (Are they performing as expected?)
Add up tax-loss harvesting possibilities
Max out contributions to 401(k)s or other tax-advantaged retirement accounts
Make last-minute charitable donations
Pay deductible taxes for 2010 early, if it helps reduce adjusted gross income
If the alternative minimum tax applies to you, take AMT-appropriate actions

Investors should consult a tax professional about their specific situation.

2010 Income Tax Changes

The 2010 tax year will see a number of changes that could affect issues ranging from the size of your tax bill to how you structure your retirement plan. The following are some key topics of which you should be aware.

Roth Conversion Considerations
In 2010, anyone, regardless of income, can convert assets in pre-tax retirement accounts to a Roth IRA.* Converting to a Roth requires you to pay ordinary income tax on the amount converted, but your account will not be taxed any further as long as you take a qualified withdrawal. Until now, converting to a Roth has not been available to individuals with annual taxable incomes greater than $100,000.

Income taxes due on 2010 Roth conversions can be spread over two years, so the 2010 conversion amount may be included as taxable income in 2011 and 2012.**

The Return of RMD
After a one-year hiatus, in tax year 2010, the IRS once again requires individuals aged at least 70½ to take required minimum distributions (RMDs) from most retirement accounts.

The Fate of the Estate Tax
As of December 2009, the estate tax was slated to expire at year's end. However, Congress is expected to revisit this issue in early 2010. Check with your financial advisor or tax professional for changes that may affect you.

However, under federal estate tax laws in effect in 2009, the assets of the deceased may be stepped-up in basis to the fair market value at date, eliminating capital gains taxes when heirs sell assets. In 2010, if Congress does not act to extend the estate tax, the step-up in basis will be limited to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse.

The American Opportunity Credit
This legislation modifies the existing Hope Credit (for college education purposes) in tax year 2010, just as it did in the prior tax year, making a broader range of taxpayers eligible.

Capital Gains Tax
The extension of the Economic Growth and Tax Reconciliation Act is slated to expire in 2010, making it the last year in which the tax rate on qualified dividends and long-term capital gains is 0% for those in the 10% and 15% income tax brackets.

After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

Tax Brackets
Unless Congress takes action in 2010, tax cuts passed in 2001 and 2003 will expire on December 31, 2010, tax brackets will be higher, and fewer deductions may be available.

* Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

** The option to spread the federal income taxes over two years applies to 2010 only. For conversions occurring after 2010, the federal income taxes due must be paid in full the following tax year going forward.

Income Tax Rates

Taxable income is income after all deductions, including either itemized deductions or the standard deduction, and exemptions.

Married Taxpayer Joint/Surviving Spouse
Taxable Income	Pay	Percentage of Excess	Of Amount Above
Less than $16,750	N/A	10%	$0
16,750 – 68,000	$1,675	15	16,750
68,000 – 137,300	9,362.50	25	68,000
137,300 – 209,250	26,687.50	28	137,300
209,250 – 373,650	46,833.50	33	209,250
More than 373,650	101,085.50	35	373,650

Single Taxpayer
Taxable Income	Pay	Percentage of Excess	Of Amount Above
Less than $8,375	N/A	10%	$0
8,375 – 34,000	$835	15	8,375
34,000 – 82,400	4,675	25	34,000
82,400 – 171,850	16,750	28	82,400
171,850 – 373,650	41,754	33	171,850
More than 373,650	108,421.25	35	373,650

Head of Household
Taxable Income	Pay	Percentage of Excess	Of Amount Above
Less than $11,950	N/A	10%	0
11,950 – 45,500	1195	15	11,950
45,550 – 117,650	6,235	25	45,550
117,650 – 190,550	24,260	28	117,650
190,550 – 373,650	44,672	33	190,550
More than 373,650	105,095	35	373,650

Personal and Dependency Exemptions

Exemptions per person:

$3,650

The phase-out for personal exemptions and itemized deductions has been eliminated, effective in 2010.

Standard Deductions*

Single
Head of Household
Joint
*Extra Deduction if Blind or over 65
Single
Head of Household

$5,700
8,400
11,400

1,400
1,100

Key Tax Rules

Kiddie Tax Rules
The Kiddie Tax rules require the unearned income of a child or young adult be taxed at the greater of the child's or parents' marginal tax bracket once the unearned income exceeds $1,900. Under the Kiddie Tax rules, the first $950 in unearned income is not subject to tax. The next $950 of unearned income is taxed at the child's rate (typically 10%). Then, any unearned income of more than $1,900 is taxed at the parents' marginal rate. The Kiddie Tax rules apply to unearned income of the following:

A child under age 18,
An 18-year-old whose unearned income does not exceed one-half of his or her support, and
A 19- to 23-year-old full-time student whose income does not exceed one-half of his or her support.

Individual Dividend Rates

Individual Dividend Rates
	Maximum Rate	Rate for Qualified Dividends*
Taxpayers Above the 15% Bracket	35%	15%
Taxpayers in the 15% Bracket and Below	15	0

*"Qualified dividends" generally means dividends received during 2010 from domestic corporations. The investor must own the stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. These periods are doubled for preferred securities.

Capital Gains Tax Rates

Description of Capital Gains Tax Rates
Holding Period	Maximum Rate*	Rate for Qualified Capital Gains**
Assets Held One Year or Less	35%	35%
Assets Held More than One Year and Sold by Individuals in the 25% Tax Bracket or Above	15	15
Assets Held More than One Year and Sold by Individuals in the 15% Tax Bracket or Below	5	0

*The maximum rate on qualified five-year gains has effectively been eliminated for capital gains realized after May 5, 2003.

**"Qualified capital gains" refers to gains realized after May 5, 2003.

Individual Retirement Accounts

Generally, contributions are fully deductible unless you or your spouse are covered by a workplace retirement plan, in which case the following deduction phase-outs apply.

Traditional IRA: Deductability of Contributions
Status	Adjusted Gross Income	Deduction
Married Filing Jointly	$0 – 89,000 89,001 – 109,000 More than 109,000	$5,000 Maximum Partial None
Single	$0 – 56,000 56,001 – 66,000 More than 66,000	$5,000 Maximum Partial None
For Noncovered Spouse*	$0 – 167,000 167,001 – 177,000 More than 177,000	$5,000 Maximum Partial None

*Applies to individuals whose spouses are covered by a workplace plan but are not covered themselves.

Roth IRA: Eligibility of Contributions
Contributions made to a Roth IRA are not deductible, unlike contributions made to a traditional IRA, and there is no age restriction on making contributions. An individual may contribute up to $5,000 to the Roth IRA, subject to income phase-out limits.

Status	Adjusted Gross Income	Deduction
Married	$0 – 167,000 167,001 – 177,000 More than 177,000	$5,000 Maximum Partial None
Single	$0 – 105,000 105,001 – 120,000 More than 120,000	$5,000 Maximum Partial None

Catch-Up Contributions
If you have either a traditional or a Roth IRA and attain age 50 or older during the tax year, an additional $1,000 may be contributed.

Trust and Estate Income Tax Rates

Taxable Income	Pay	Percentage of Excess	Of Amount Above
Not more than $2,300	N/A	15%	$0
2,300 – 5,350	$345	25	2,300
5,350 – 8,200	1,107.50	28	5,350
8,200 – 11,200	1,905.50	33	8,200
More than 11,200	2,895.50	35	11,200

Education Planning

Education Credits

American Opportunity Credit (formerly Hope Credit)*	Up to 100% of the first $2,000 and 25% of the next $2,000 to a maximum of $4,000 of expenses; maximum credit is $2,500
Lifetime Learning Credit	Up to 20% of the first $10,000 (per taxpayer) of qualified expenses paid in 2010
MAGI Phase-Outs Married Filing Jointly Single	$160,000 – 180,000 80,000 – 90,000

*Can be claimed for up to four years.

Student Loan Interest Deduction

Maximum Deduction	$2,500
MAGI Phase-Outs Married Filing Jointly Single	$120,000 – 150,000 60,000 – 75,000

Tax Credits

Child Tax Credit: $1,000 Per Eligible Child
This exemption is phased out for individuals with income in excess of $75,000, married couples with income in excess of $110,000 and married individuals filing separately with income in excess of $55,000.

Lifetime Gift Tax Credit

2010 and Later

$1,000,000 (Not Indexed)

Annual Exclusion for Gifts

2010

$13,000

The information provided in these web pages is based on internal and external sources believed reliable; however, the accuracy and completeness of the information is not guaranteed and the figures may have changed since the time of printing. Examples are hypothetical illustrations and not intended to reflect the actual performance of any particular security. Please consult your tax advisor for questions relating to your individual situation.