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Investor’s Tax Report

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February 2011 | Brought to you by Rule Your Retirement

Master Your Taxes

With the cold weather that has swept across America this year, we all may be looking forward to spring a little more
than usual. However, as warmer temperatures approach, don’t forget to block out 30 hours to stay inside for that annual
late-winter/early-spring tradition: filing taxes.
It’s true: Experts estimate that it can take almost 30 hours to prepare and file a tax return. Of course, you don’t have
to wait until Old Man Winter gives way to Young Dude Spring to spend some quality time with a 1040, especially if
you expect to get money back. In fact, most people do get money back — an average of $3,036, according to numbers
released by the IRS midway through last year’s tax season. No reason to dilly-dally when that money could be put to
good use — perhaps in an IRA — as soon as possible.
While completing a tax return is never fun, we’ve tried to make it easier for you by once again offering this handy-
dandy special report, brought to you by The Motley Fool’s Rule Your Retirement newsletter service. Phil Marti
(TMFPMarti) — Rule Your Retirement discussion-board stroller and 25-year IRS veteran — returns to offer tips, tricks,
and traps (that is, how to avoid them), including:
• Why you have three extra days to submit your return this year
• Tips for organizing your important paperwork
• How provisions of the stimulus bills will affect your tax return
• Reasons your taxes might decrease in 2011
• Tax consequences of the new health-care legislation
• All the important tax numbers for 2011, including contribution limits for retirement accounts
If you’ve read this report and still have questions, visit the Taxes, Insurance, & Estates discussion board at
ruleyourretirement.fool.com or the Tax Strategies discussion board on fool.com.

Rule on!

Robert Brokamp, CFP®

Advisor, Rule Your Retirement

Inside
2 Timeless Tax Tips 3 To Your Health
Five classic ways to prepare for April 15 (or this year, April 18). Things are changing in health-care law. Here’s what to know.

3-4 Plan Ahead for 2011 and 2012 5 2011 Inflation Adjustments
Peek into the future with our list of expected tax credits and rules The crucial numbers for the upcoming year.
for the coming years.
Timeless Tax Tips
A few odd Fools actually enjoy doing their taxes (you know who you are), but we at Fool HQ realize that annual
April deadline is a date that makes many people cringe. So we’re here to share some timeless tips for easier return
preparation. Then we’ll look at the specific issues you should keep in mind as you’re completing your 2010 return.

Preparing Your Return

Whether you prepare your own return or have someone else do it for you, you still have some work to do. Here are a
few tips to make tax time as easy as possible — both on your nerves and on your wallet.

Tip 1: Get organized.

Make a list of your income sources and potential deductions. When you’ve checked off the last item on your list —
indicating that you have the paperwork in hand — you’re ready to do your return.

Tip 2: Gather your records.

Get a big manila envelope, staple your list to the front of it, and keep it where you open the mail. As your documents
come in, check them for correctness, put them in the envelope, and check them off your list.

Tip 3: Take a trip down memory lane.

If you itemize deductions, go through your check register, credit card statements, and calendar. Total up each type of
deduction, and put the result in your envelope. Don’t forget charitable and medical mileage, and make sure you have
any documentation required for a charitable contribution.

Tip 4: Look to the future.

There’s little you can do now to reduce your 2010 income, with one exception: the traditional IRA. You have until
April 18, 2011, to make IRA contributions for 2010. If you qualify for a deductible contribution as explained in IRS
Publication 590, you can make a contribution now and deduct it on your 2010 return. Even if you don’t qualify for a
deduction, you can make nondeductible traditional IRA contributions or Roth IRA contributions for 2010 through April
18, 2011. These contributions won’t affect your 2010 tax bill, but they offer tax-deferred (traditional) or tax-exempt
(Roth) growth pending your retirement.

Tip 5: File on time.

You will be fined 5% of the taxes you owe for every month your return is late. And no, “My accountant ate my
return” is not a reasonable excuse for getting that penalty waived. If you can’t meet the April 18 deadline, you can get
an automatic extension to Oct. 17, 2011, for filing your 2010 return. This is not an extension for getting your payment
in — you still need to estimate your balance due and pay it by April 18 to avoid interest and the late-payment penalty.

Now get cracking, Fools!

2 Motley Fool Rule Your Retirement Investor’s Tax Report — February 2011 ruleyourretirement.fool.com
Investor’s Tax Report February 2011 2
To Your Health
You may have heard something in the news about health-
care legislation. OK, you may have heard so much that
you want to throw something at the TV. We want to briefly
separate the useful information from the placebos for you.
The law is on the books, and it’s improbable that it will
disappear throughout the remainder of this presidential
term, regardless of what you hear. So let’s take a look at
the tax aspects, two of which are already in effect. Please
note that if you are an employer, you need personalized,
professional advice regarding the new health-care law.
Over-the-Counter Medicines and Drugs
For purchases on and after Jan. 1, 2011, you must have a
prescription if you want to pay for them through a tax-free
distribution from a tax-advantaged health-expense plan
(flexible spending arrangements, health savings accounts,
etc.). Previously, these were qualified distributions even if
you didn’t have a prescription. There is no change regarding
other OTC items such as insulin.
The IRS has an extensive Q&A available at www.irs.gov/
newsroom/article/0,,id=227308,00.html.
Planning for 2011 and 2012
You have to laugh when you hear a politician use
the word “permanent” in connection with tax law. It’s
permanent only until Congress changes it. We can hope,
though, that the agreement brokered late in 2010 regarding
tax years 2011 and 2012 will hold. Although Republicans
now control the House, Democrats still have a majority
in the Senate, and there will be a Democrat in the White
House at least until January 2013. Yes, we’ve heard talk
of a major rewrite of the law in 2011 to “fix” things and
make everyone’s life better. To quote comedienne Judy
Tenuta, using her signature line as a follow-up to some
outrageous claim she just made, “It could happen.”
On the more likely chance that it won’t, let’s take a look individuals and $74,450 for those married and filing
at what our friends in Washington have come up with.
Lest we get too complacent, they’ve thoughtfully provided against AMT.
us with a mishmash of some things that apply to only 2011
and some that are good through 2012.
Note that there are numerous tax breaks for businesses
in the package approved in December. We won’t go into
them here, but if you run a business, you need to make
sure you have good professional tax advice now more
Investor’s Tax Report February 2011 3
Excise Tax on Tanning Services
If you patronize a tanning facility, stop it this instant!
In addition to what a dermatologist would tell you if
you asked, you now face a 10% excise tax. The ever-
helpful IRS has a Q&A at www.irs.gov/businesses/small/
article/0,,id=224600,00.html.
Still to Come
Starting with 2011 W-2s (issued in January 2012), there
will be a place for an informational item about the cost of
employer-paid health insurance. The information is optional
for 2011 and required thereafter. There is no change in the
tax treatment. This will be only an informational item.
The major tax provisions kick in on Jan. 1, 2013. They
include:
• Reduced contribution limits to tax-advantaged plans.
• Medicare tax on investment income over $250,000.
• Increased exclusion (from 7.5% of AGI to 10%) for
deductible medical expenses.
than ever. Likewise, the new bill addressed estate taxes
in several ways. As always, if you have enough assets
to worry about an estate tax, you need a professional
personal advisor.
In the spotlight for 2011 only:
Alternative Minimum Tax Relief
Washington is thumping its collective chest, because
instead of giving us the traditional year-by-year patch,
the December miracle gave us a bold two-year patch.
Unfortunately, 2010 was one of those two years.
In 2011, the exemption amounts are $48,450 for
jointly. Nonrefundable personal credits are also allowed
Payroll Tax Holiday
The Social Security tax withheld from employees is
reduced by 2%, resulting in a rate of 4.2% on the first
$106,800 of wages and salary. The Social Security portion
Continues on page 4
Plan Ahead for 2010
Continued from page 3
of the self-employment tax is also adjusted, resulting in a
rate of 10.4% to the same limit. The Medicare tax and the
employer’s portion of Social Security are unchanged.
The IRS has issued guidance for employers and payroll
services, but the agency may not have everything in
place by your first payday in 2011. If not, it should be in
place no later than Jan. 31, and any overwithholding is to
be resolved by March 31. Check your pay stubs carefully
to make sure the correct amount is being withheld and
that any prior excess FICA withholding is adjusted.
Unlike excess FICA withheld by multiple employers,
your sole source of repayment of an excess by one
employer is that employer.
Residential Energy Credits
They’re extended, but they’ve been reduced to pre-
stimulus levels.
Perennial cliffhangers extended
through 2012
• Above-the-line deductions for K-12 educators and
tuition and fees.
• The Schedule A choice of deducting state income or
sales tax.
• A direct distribution from retirement accounts to
charity for those subject to required minimum distri-
butions.
• A deduction for private mortgage insurance.
Investor’s Tax Report February 2011 4
Good through 2012
Tax Brackets
They’re static at 10%, 15%, 25%, 28%, 33%, and 35%.
Bracket limits for 2012 will be adjusted for inflation in the
fall of 2011, but the basic structure stays the same.
Personal-Exemption and Itemized-Deduction
Phaseouts
Both of these phaseouts were eliminated for 2010 and do
not apply through 2012.
Long-Term Capital Gains and Qualified Dividends
The 2010 tax rates of zero for those below the 25%
bracket and 15% for all others are extended through 2012.
Family-Related Credits
The Child Tax Credit remains $1,000 for each eligible
child, and the expanded refundable credit is extended.
The expanded or increased Dependent Care, Adoption
Expense, and Earned Income Tax Credits are all extended.
Education Incentives
Expanded dollar limits and qualified expenses for all of
the following are extended through 2012:
• American Opportunity Credit
• Coverdell Education Savings Accounts
• Employer-paid education expenses
• Student-loan interest deduction
• Scholarship exclusions from income
2011 Inflation Adjustments
Many tax provisions are indexed for inflation. To help you plan for 2011, we’re including some of the highlights of
this year’s adjustments. If there’s something else you’re interested in, each affected IRS publication has a “What’s
New” section near the front. And remember, you can always visit the Fool’s Tax Strategies board.

Standard Deduction Bracket Limits

Single $5,800 Remember that these figures are for taxable income, after you’ve
Married, filing jointly/surviving spouse $11,600 taken your exemptions and deductions. If you’re fortunate enough
Married, filing separately $5,800 to find your taxable income above the highest amount shown for
your filing status, the excess is taxed at 35%.
Head of household $8,500
10% 15% 25% 28% 33%
Additional amount over age 65
Single $8,500 $34,500 $83,600 $174,400 $379,150
Single/head of household $1,450
Married, filing jointly/
Married $1,150 $17,000 $69,000 $139,350 $212,300 $379,150
surviving spouse
Other Deductions Married, filing separately $8,500 $34,500 $69,675 $106,150 $189,575
Personal Exemptions $3,700 Head of household $12,150 $46,250 $119,400 $193,350 $379,150

IRA Contributions
The limit remains $5,000, or $6,000 for those 50 or older at the end of 2011. The limit is for combined Roth and
traditional IRA contributions (in other words, you can’t contribute $5,000 to a traditional IRA and $5,000 to a Roth IRA).

Roth IRA Income Limits Traditional IRA Deductions

Eligibility to make Roth contributions is phased out If neither you nor your spouse is covered by a
above certain adjusted gross income limits based on retirement plan at work, you can deduct your traditional
filing status. Below the lower number, you can make a IRA contribution. Otherwise, deductibility is phased
full contribution. Above the higher number, you cannot out over an adjusted gross income range, depending on
contribute. Between the two, you can make a partial filing status.
contribution. If your income puts you in the phaseout
Single/head of household $56,000-$66,000
range, there’s a worksheet in Publication 590 you can use
to calculate your maximum contribution. Married, filing jointly, covered by plan $90,000-$110,000
Married, filing jointly, not covered but
Married, filing jointly $169,000-$179,000 $169,000-$179,000
spouse is
Single/head of household $107,000-$122,000 Married, filing separately, either spouse
$0-$10,000
Married, filing separately $0-$10,000 covered

Salary Deferrals Gift Tax Social Security

The limit remains $16,500. The The gift tax exclusion remains The maximum taxable earnings
catch-up limit for those 50 or $13,000 per donee. amount remains $106,800.
older remains $5,500.

ruleyourretirement.fool.com Investor’s Tax Report — February 2011 Motley Fool Rule Your Retirement 5
Investor’s Tax Report February 2011 5