PROPERTY OWNERSHIP TIPS Home-related tax breaks Homebuyers credit.  If you purchased a home before May 1, 2010 (July 1 if a binding contract was in place before May 1), you may be eligible for a credit of up to $8,000 as a "first-time homebuyer or $6,500 as a "long-time" homeowner.  But income-based phaseouts apply.  Check with your tax advisor to see if you're eligible. Property tax deduction.  If you're looking to accelerate or defer deductions, property tax is one expense you may be able to time.  You can choose to pay your 2010 bill that's due in early 2011 by Dec 31, 2010, and deduct it is this year.  Or you can wait until the due date and deduct it in 2011. Mortgage interest deduction.  You can generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence.  Points paid related to your principal residence also may be deductible. Home equity debt interest deduction.  Interest on home equity debt used to improve your principal residence and interest on home equity debt used for any purpose (debt limit of $100,0000 - may be deductible).  So consider using a home equity loan or line of credit of pay off credit cards or auto loans, for which interest isn't deductible. Home Rental Rules If you rent out all or portion of your principal residence or second home for less than 15 days, you don't have to report the income.  But expenses associated with the rental aren't deductible. If you rent out your principal residence or second home for 15 days or more, you'll have to report the income.  But you also may be entitled to deduct some or all of your rental expenses - such as utilities, repairs, insurance and depreciation. If the home isn't classified as a rental property for tax purposes (based on the amount of personal vs. rental use), you can deduct rental expenses only to the extent of your rental income.  Any excess can be carried forward to offset rental income in future years.  You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes. If the home is classified as a rental property, you can deduct rental expenses, including losses, subject to the passive activity rules.  You can't deduct any interest that's attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.  In some situations, it may be beneficial to reduce personal use of a residence so it will be classified as a rental property. Real estate activity losses Losses from investment real estate or rental property are passive by definition - unless you're a real estate professional.  Then you can deduct real estate activity losses in full.  To qualify as a real estate professional, you must annually perform: More than 50% of your personal services in real property trades or businesses in which you materially participate and, More than 750 hours of service in these businesses during the year. Each year stands on its own, and there are other nuances to be aware of.  If you're concerned you'll fail either test and be stuck with passive losses, consider increasing your hours so you'll meet the test.  Home Sales When you sell your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain in you meet certain tests.  To support an accurate tax basis, maintain thorough records, including information on your original cost and subsequent improvements, reduced by casualty losses and any depreciation that you may have claimed based on business use. Warning:  Gain on the sale of a principal residence generally isn't excluded from income if the gain is allocable to a period of nonqualified use.  Generally, this is any period after 2008 during which the property isn't used as your principal residence.  There's an exception if the home is first used as a principal residence and then converted to nonqualified use. Losses on a principal residence aren't deductible.  But if part of your home is rented or used exclusively for your business, the loss attributable to that portion will be deductible, subject to various limitations. Because a second home is ineligible for the gain exclusion, consider converting it to rental use before selling.  It will be considered a business asset, and you may be able to defer tax on any gains by doing a Section 1031 exchange.  Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion. Tax-deferral strategies for investment property It's possible to divest yourself of appreciated investment real estate or rental property but defer the tax liability.  Such strategies may, however, be risky from a tax perspective until there's more certainty about future capital gains rates - if rates go up, tax deferral could be costly.  So tread carefully if you're considering a deferral strategy such as the following: Installment sale.  An installment sale allows you to defer gains by spreading them over several years as you receive the proceeds. Warning:  Ordinary gain, including certain depreciation recapture, is recognizaed in the year of sale, even if no cash is received. Sec. 1031 exchange.  Also known as a "like-kind" exchange, this technique allows you to exchange one real estate investment property for another and defer paying tax on any gain until you sell the replacement property.  Warning:  Restrictions and significant risks apply. Charitable Giving Tips Cash Donations Outright gifts of cash (which include donations made via check, credit card, and payroll deduction) are the easiest.  The key is to substantiate them.  To be deductible, cash donations must be: Supported by a cancelled check, credit card receipt or written communication from the charity if they're under $250, or Substantiated by the charity if they're $250 or more. Deductions for cash gifts to public charities can't exceed 50% of your AGI. The AGI limit is 30% for cash donations to nonoperating private foundations.  Contributions in excess of the applicable AGI limit can be carried forward for up to five years. AMT Alert!  Charitable contribution deductions are allowed for AMT purposes, but your tax savings may be less if you're subject to the AMT.  For example, if your'e in the 35% tax bracket for regular income tax purposes, but the 28% tax bracket for AMT purposes, your deduction may be worth only 28% instead of 35%. Stock Donations Publicly traded stock and other securities you've held more than one year are long-term capital gains property, which can make one of the best charitable gifts.  Why?  Because you can deduct the current fair market value and avoid the capital gains tax you'd pay if you sold the property. Donations of long-term capital gains property are subject to tighter deduction limits - 30% for gifts to public charities, 20% for gifts to nonoperating private foundations.  In certain circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary income property (such as stock held one year or less). Don't donate stock that's worth less than your basis.  Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity. Making gifts over time  If you don't know which charities you want to benefit but you'd like to start making large contributions now, consider a private foundation.  It offers you significant control over how your donations will be used. But you must comply with complex rules, which can make foundations expensive to run.  Also, the AGI limits for deductibility of contributions to nonoperating foundations are lower. If you'd like to influence how your donations are spent but avoid a foundation's tight rules and high expenses, consider a donor-advised fund.  Many larger public charities offer them.  Warning:  To deduct your donor-advised fund contribution, you must obtain a written acknowledgement from the sponsoring organization that it has exclusive legal control over the assets contributed. Charitable remainder trusts To benefit a charity while helping ensure your own financial future, consider a charitable remainder trust (CRT): For a given term, the CRT pays an amount to you annually (some of which may be taxable). At the term's end, the CRT's remaining assets pass to one or more charities. When you fund the CRT, you receive an income tax deduction for the present value of the amount that will go to charity. The property is removed from your estate. A CRT also can help diversify your portfolio if you own non-income-producing assets that would generate a large capital gain if sold.  Because a CRT is tax-exempt, it can sell the property without paying tax on the gain at the time of the sale.  The CRT can then invest the proceeds in a variety of stocks and bonds. You can name someone other than yourself as income beneficiary or fund the CRT at your death, but the tax consequences will be different.  Warning:  Special rules may apply to CRTs in 2010; check with your tax advisor for details.  Charitable lead trusts To benefit charity while transferring assets to loved ones at a reduced tax cost, consider a charitable lead trust (CLT): For a given term, the CLT pays an amount to one or more charities. At the term's end, the CLT's remaining assets pass to one or more loved ones you name as remainder beneficiaries. When you fund the CLT, you make a taxable gift equal to the present value of the amount that will go to the remainder beneficiaries. The property is removed from your estate. For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Internal Revenue Code's Section 7520 rate.  The lower the Sec. 7520 rate, the smaller the remainder interst and the lower the possible gift tax.  If the trust's earnings outperform the Sec. 7250 rate, the excess earnings will be transferred to the remainder beneficiaries tax free.  Because the Sec. 7520 rate currently is low, now may be a good time to take the chance that your actual return will outperform it. You can name yourself as the remainder beneficiary or fund the CLT at your death, but the tax consequence will be different. Family & Education Tips The "kiddie tax" The income shifting that once - when the "kiddie tax" applied only to those under age 14 - provided families with significant tax savings now offers much more limited benefits.  Today, the kiddie tax applies to children age 18 and younger, as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). For children subject to the kiddie tax, any unearned income beyond $1,900 (for 2010) is taxed at their parents' marginal rate rather than their own, likely lower, rate.  Keep this in mind before transferring investments to them. Roth IRAs for teens Roth IRAs can be perfect for teenagers because they likely have many years to let their accounts grow tax free. The 2010 contribution limit is the lesser of $5,000 or 100% of earned income, reduced by any traditional IRA contributions.  Contributions aren't deductible, but if the child earns no more than $5,700 (the 2010 standard deduction for singles) and has no unearned income, he or she will pay zero federal income tax anyway.  If a child earns more than $5,700, the income likely will be taxed at only 10% or 15%.  So the tax-free treatment of future qualified distributions will likely be well worth the loss of any current deduction. If your children or grandchildren don't want to invest their hard-earned money, consider giving them the amount they're eligible to contribute - but keep the gift tax in mind.  If they don't have earned income and you own a business, consider hiring them.  As the business owner, you can deduct their pay, and other tax benefits may apply.  Warning:  They must perform actual work and be paid in line with what you'd pay nonfamily employees. Saving for education Coverdell Education Savings Accounts (ESAs) and 529 savings plans offer parents (or anyone else, such as grandparents) a tax-smart way to fund education expenses: Contributions aren't deductible for federal purposes, but plan assets grow tax-deferred. Distributions used to pay for qualified expenses - such as tuition, mandatory fees, books, equipment, supplies, and generally, room and board - are income tax-free for federal purposes and may be tax free for state purposes. You remain in control of the account - even after the child is of legal age. You can make rollovers to another qualifiying family member. Which plan is better depends on your situation and goals.  You may even want to set up both an ESA and a 529 plan for the same student. ESA pluses and minuses Perhaps the biggest ESA advantage is that you have direct control over how and where your contributions are invested.  Another significant advantage has been that tax-free distributions aren't limited to college expenses; they also can't fund elementary and secondary school costs. However, if Congress doesn't act to extend this treatment, distributions used for pre-college expenses will be taxable starting in 2011.  Additionally, the annual ESA contribution limit per beneficiary is only $2,000 for 2010, and it will grow to $500 for 2011 if Congress doesn't act.  (Check with your tax advisor for the latest information.)  Contributions are further limited when MAGI reaches $190,000 (joint filers) or $95,000 (other filers), and no contributions are allowed when MAGIP reaches $220,000 (joint filers) or $110,000 (other filers). Generally, contributions can be made only for the benefit of a child under age 18.  Amounts left in an ESA when the beneficiary turns 30 generally must be distributed within 30 days, and any earnings will be subject to tax. 529 plan pluses and minuses 529 college savings plans can be used to pay a student's qualified expenses at most postsecondary educational institutions.  For 2010, qualified expenses also include computers, computer technology and internet service.  As of this writing, this expanded definition expires after 2010; check with your tax advisor to see if it's been extended. For many taxpayers, 529 plans are better than ESAs because they typically offer much higher contribution limits (determined by the sponsoring state).  Plus, there are no income limits for contributing - and there's generally no beneficiary age limit for contributions or distributions. The biggest downside may be that you don't have direct control over investment decisions; you're limited to the options the plan offers.  Additionally, for funds already in the plan, you can make changes to your investment options only once during the year or when you change beneficiaries. But each time you make a new contribution, you can select a different option for that contribution, regardless of how many times you contribute throughout the year.  And you can make a tax-free rollover to a different 529 plan for the same child every 12 months. 529 plans also are available in the form of a prepaid tuition program.  If your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school.  The main downside is that there's uncertainty is how benefits will be applied if the beneficiary attends a different school. Your state may offer tax benefits to residents who invest in its own 529 plan. Jumpstarting a 529 plan To avoid gift taxes on 529 plan contributions, you must either limit them to $13,000 annual exclusion gifts or use up part of your $1 million lifetime gift tax exemption.  Fortunately, a special break for 529 plans allows you to front-load five years' worth of annual exclusion gifts and make a $65,000 contribution (or $130,000 if you split the gift with your spouse).  And that's per beneficiary. If you're a grandparent, this can be a powerful estate planning strategy. American Opportunity credit When your child enters college, you may not qualify for the American Opportunity credit because your income is too high, but your child might.  The credit covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses.  The maximum credit is $2,500 per year for the first four years of postsecondary education.  And both a credit and a tax-free ESA or 529 plan distribution can be taken as long as expenses paid with the distribtuion aren't used to claim the credit. If your dependent child claims the credit, however, you must forgo your dependency exemption for the child (and the child can't take the exemption).  Before 2010, your dependency exemption might have been partially phased out based on your AGI anyway, so this decision may have been an easy one.  But this year, that AGI limit has been lifted.  So you'll need to work with your tax advisor to see whether the exemption or the credit will provide the most tax savings overall for your family. Finally, keep in mind that the credit is scheduled to expire after 2010 but may be extended.