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2009
Year-end Tax Letter
INDIVIDUAL TAX
PLANNING
Charitable Contributions
As
a general rule, you may deduct the full
amount of monetary donations made to
qualified charitable organizations. If you
donate appreciated property held for more
than one year, you can generally deduct the
fair-market value of the property. If you
use a credit card to pay for donations
before January 1, 2010, you can deduct the
full amount on your 2009 return—even if you
don’t actually pay off the credit card
charge until 2010.
Be
aware that Congress recently tightened the
substantiation rules for monetary gifts.
For instance, no deduction is allowed
unless you maintain a record of the
contribution, such as a bank statement,
receipt or written communication from the
charity.
Alternative Minimum Tax
The alternative minimum tax (AMT) is a
special tax return calculation involving
certain “tax preference” items, technical
adjustments and an exemption amount based on
your filing status. However, the exemption
amounts are phased out for high-income
taxpayers. In effect, if the resulting AMT
liability exceeds your regular income tax
liability, you must pay the higher of the
two. The AMT rate is 26% for the first
$175,000 of AMT income; 28% on amounts above
$175,000.
Year-end strategy:
Depending on your situation, it may make
sense to shift tax preference items to 2010
to avoid or reduce AMT liability this year.
If you are facing AMT liability for 2009 and
expect to be in a high regular income tax
bracket next year, you might accelerate
additional income into 2009. The extra
income will be taxed at either the 26% or
28% AMT rate.
Higher Education
If
you are sending a child to college or grad
school, the tax law provides some tax relief
through credits and deductions. However, be
aware that these tax benefits are phased out
for high-income taxpayers.
Year-end strategy:
Generally, you’re entitled to the tax
benefits on your 2009 return for amounts
paid or incurred this year. For instance, if
you pay the tuition bill for the spring 2010
semester in December, you may qualify for a
credit or deduction in 2009. Here’s a brief
summary of the two main tax breaks for
higher education:
1.
Tax credits:
You may qualify for either one of two
credits.
Under the revamped American Opportunity Tax
Credit (formerly called the Hope credit),
the maximum credit for 2009 is $2,500 (up
from $1,800 for 2008). The credit begins to
phase out for joint filers with a modified
adjusted gross income (MAGI) of $160,000;
$80,000 for single filers. The maximum
Lifetime Learning credit of $2,000 begins to
phase for joint filers with an MAGI of
$100,000; $50,000 for single filers.
2.
Tuition deduction:
The maximum deduction for 2009 is $4,000 of
qualified tuition and related fees for joint
filers with an MAGI of $130,000 or less;
$65,000 for single filers. The maximum
deduction is $2,000 for joint filers with an
MAGI up to $160,000; $80,000 for single
filers.
The
tax law also allows you to deduct up to
$2,500 of annual interest paid on student
loans. For 2009, the deduction begins to
phase out for joint filers with an MAGI of
$120,000; $60,000 for single filers.
New-vehicle Deduction
The new economic stimulus law includes a
special tax provision designed to generate
sales of motor vehicles. It applies to
qualified vehicles purchased after February
16, 2009.
Year-end strategy:
If you purchase the vehicle before 2010,
you may currently deduct the sales taxes
attributable to the first $49,500 of the
vehicle’s price. But the deduction begins to
phase out if your MAGI exceeds $250,000 for
joint filers; $125,000 for single filers.
For this purpose, a “qualified vehicle”
includes passenger cars, light trucks,
motorcycles and sport utility vehicles
(SUVs) weighing no more than 8,500 gross
pounds. Motor homes are also eligible for
this tax break. The deduction can be claimed
only by the initial purchaser of the
vehicle. In addition, it is not
available for used vehicles, only new ones.
Kiddie Tax
Under the “kiddie tax,” unearned income of a
child who has not reached a specified age is
taxed at the top marginal tax rate of the
child’s parents to the extent it exceeds an
annual threshold. The threshold for 2009 is
$1,900 (up from $1,800 for 2008). Due to a
recent tax law change, the kiddie tax
currently applies to a child under age 19
(age 24 for children who are full-time
students) if the child does not have earned
income equal to half of his or her annual
support. Thus, this tax affects a wide range
of families.
Estimated Tax
Avoid a penalty under one of three “safe
harbor” rules. Typically, you may qualify by
adjusting your withholding before the end of
the year. The safe harbor exceptions are as
follows:
1.
Your annual payments equal at least 90% of
your current liability.
2.
Your annual payments equal at least 100% of
the prior year’s tax liability (110% if your
AGI for the prior year exceeded $150,000).
The
economic stimulus law creates a special
exception for qualified small-business
owners. If you run a small business, you may
be able to base payments on 90% of the prior
year’s tax liability.
Capital Gains and Losses
For tax purposes, capital gains and losses
are used to offset each other. However, any
excess capital loss can also offset up to
$3,000 of high-taxed ordinary income in
2009. The remainder is carried over to next
year. If a gain qualifies as long-term
capital gain (i.e., you have owned the asset
for more than a year), the maximum tax rate
on the gain is normally
15% (5% for low-income taxpayers).
•
Under the “wash sale rule,” you cannot
deduct a loss on securities sales if you
acquire substantially identical securities
within 30 days. To avoid this result, you
can (1) wait at least 31 days to repurchase
the securities, (2) acquire replacements and
wait at least 31 days before selling the
first shares or (3) buy similar (but not
identical) securities.
•
From a tax perspective, it is generally
beneficial to sell mutual fund shares before
the fund declares dividends at year-end (the
“ex-dividend date”) and to buy shares after
the date the fund declares dividends.
•
Consider investments in dividend-paying
stocks. As with long-term capital gains, the
maximum income tax rate on qualified
dividends received in 2009 is only 15% (0%
for taxpayers in the 10% and 15% regular
income tax brackets).
Miscellaneous
•
When state law permits, you can consolidate
outstanding personal debts into a home
equity debt. Interest on personal debts is
not deductible, but you may deduct mortgage
interest paid on the first $100,000 of home
equity debt, no matter how the proceeds are
used.
Caution:
The debt must be secured by your home.
•
Miscellaneous expenses are deductible to the
extent that the annual total exceeds 2%of
your AGI. If possible, pay these expenses at
year-end to maximize your deduction for
2009.
•
You may claim a state sales tax deduction in
lieu of deducting state income tax on your
2009 return. The sales tax deduction is
based on a state-by-state table. Keep
records of“big-ticket items,” such as cars
and boats that can be added to the table
amount.
•
You can deduct your annual unreimbursed
medical expenses over 7.5% of your AGI. If
you are near the 7.5% mark or already over
it, schedule nonemergency medical and dental
visits before the end of the year.
•
Take advantage of the energy tax credit for
installations in your home. The new economic
stimulus law enhanced the residential energy
credit for installations in 2009.
•
If you qualify as a “first-time homebuyer,”
you may claim a credit of up to $8,000 for
purchasing a home before May 1, 2010. If you
are planning on selling your home and buying
a new residence before May 1, 2010, you may
be able to claim a credit of up to $6,500.
•
Property owners who use the standard
deduction rather than itemize can take a
limited property tax deduction up to $ 500
for single taxpayers and $ 1,000 for
married couples filing jointly.
BUSINESS TAX PLANNING
Section 179 Deductions
Section 179 of the tax code allows your
business to “expense” (i.e., currently
deduct) the cost of qualified assets within
an annual limit . Under the 2009 law, your
business can currently deduct up to $250,000
of qualified assets placed in service this
year.
Depreciation Deductions
The new economic stimulus law also extends
the “bonus depreciation” deduction through
the end of 2009. Under the new law, a
business may claim a 50% “bonus
depreciation” deduction for qualified
assets—property with a cost recovery period
of 20 years or less and certain software,
leasehold improvements and water utility
property—if they are placed in service
before 2010 . Furthermore, a business is
allowed to claim bonus depreciation
deductions in conjunction with Section 179
deductions and regular depreciation
deductions
Miscellaneous
• Hire qualified workers before the end of
the year. For instance, if you pay a worker
from a target group at least $6,000 in wages
between now and the end of the year, you can
claim the maximum $2,400 credit for the
worker. The new economic stimulus law has
added two more groups for credit
eligibility. For workers hired and starting
work in 2009 and 2010, the WOTC covers
unemployed veterans and “disconnected youth”
between the ages of 16 and 24.
•
Purchase routine business supplies before
the end of the year. Your company can
generally deduct the cost in 2009, even if
the supplies are not used until next year.
•
Your company can deduct 100% of its
business travel costs and 50% of its
qualified entertainment and meal expenses.
To increase deductions for 2009, you might
move up trips and events initially planned
for early in 2010. Note that you can deduct
100% of the cost of a holiday party for the
entire staff.
•
Owners of commercial buildings may benefit
from making energy-efficient improvements
this year. The improvements must be
certified as meeting certain environmental
standards.
•
The new economic stimulus law generally
requires employers to subsidize continued
health insurance benefits for workers fired
or laid off in 2009. Recoup your costs
through a special payroll tax credit or
reduced withholding deposits.
Retirement Plans
401(k) Plans:
Adjust your 401(k) plan contributions to
maximize your retirement contributions. For
2009, you can defer a maximum of $16,500 to
your account.
If you’re
age 50 or over, you can add a “catch-up
contribution” of $5,500. Thus, the total
maximum annual deferral for taxpayers age 50
or over is $22,000.
IRA Plans
There are two main types of Individual
Retirement Accounts (IRAs) : traditional
IRAs and Roth IRAs.
1.
Traditional IRAs:
Contributions are tax deductible unless you
are an “active participant” in an
employer-sponsored retirement plan and your
MAGI exceeds a certain level. For 2009,
deductions are phased out for an MAGI
between $89,000 and $109,000 for joint
filers; $55,000 and $65,000 for single
filers. If your spouse is an active
participant and you are not, the deduction
is phased out for an MAGI between $166,000
and $176,000. The maximum IRA
contribution for 2009 is $5,000. Plus, if
you are 50 years of age or older, you can
make an extra “catch-up” contribution of
$1,000.
2.
Roth IRAs:
Contributions are not tax deductible, but
withdrawals after five years may be
tax-free. To qualify, distributions must be
received after age 59½, upon death or
disability or to pay first-time home-buyer
expenses (up to a lifetime limit of
$10,000). The ability to contribute to a
Roth IRA for 2009 is phased out for joint
filers with an MAGI between $166,000 and
$176,000; $105,000 and $120,000 for single
filers.
The contribution limits for Roth IRAs are
the same as for traditional IRAs. If you
choose, you may allocate contributions to
both types of IRAs, up to the total annual
limit.
The
deadline to make IRA contributions for 2009
is your tax return due date. Nevertheless,
you can boost retirement savings by
contributing sooner. This provides more time
for contributions to grow on a tax-deferred
basis.
Roth IRA Conversions
If
it suits your purposes, you may be able to
convert a traditional IRA into a Roth IRA.
For instance, you might convert to a Roth to
secure future tax-free distributions.
However, you can convert in 2009 only if
your AGI is $100,000 or less. The tax on a
conversion is based on your account balance
on the last day of the previous tax year.
Due to a recent tax law change, the
$100,000-of-AGI barrier will be removed next
year. This will provide a new opportunity
for high-income taxpayers.
Furthermore, if you convert to a Roth in
2010, the resulting tax liability may be
spread out over the following two years—2011
and 2012.
Required Minimum Distributions
Skip the RMD this year if you don’t need the
cash. Under a recent tax law change, this
requirement has been suspended for the 2009
tax year for IRAs and defined-contribution
plans like 401(k)s. In other words, if you
turned age 70½ this year, you do not have to
take an RMD by April 1, 2010. However, you
still must arrange a distribution for the
2010 tax year by December 31, 2010.
The
tax-law waiver for 2009 does not apply to
defined-benefit plans like traditional
pension plans. Participants in these plans
still must take an RMD before January 1,
2010.
Estate-tax Planning
Culminating a decade of change, the top
federal estate-tax rate has been reduced to
45% for 2009, with an effective estate-tax
exemption of $3.5 million. Significantly,
the estatetax is scheduled to be completely
repealed in 2010. However, the tax will be
revived in 2011 with a top 55% rate and only
a $1 million effective exemption, unless new
legislation is
enacted. See the chart below for the
progression after the law was changed in
2001.
Year-end strategy:
You may reduce the size of your taxable
estate through a series of lifetime gifts.
Under the annual gift-tax exclusion, you can
give each recipient up to $13,000
without paying any gift tax.
For example, if you have three children and
five grandchildren, you and your spouse can
give each one $26,000 in December 2009, and
$26,000 in January 2010. This reduces your
estate by a total of $416,
Miscellaneous
• Use up the funds in your flexible spending
account (FSA). In general, if you do not
use FSA funds by March 15, 2010, the
remainder is forfeited.
• Sell rental property on the
installment-sale basis. The gain
attributable to the sale may be spread out
if payments are received over two or more
years.
• Defer tax on investment income from
certificates of deposit (CDs) and Treasury
securities by acquiring investments that
mature after 2009. Generally, the income
from these investments is taxable in the
year it is received.
Long-term Care insurance
It is recommended that clients (especially
those approaching middle-age) consider the
purchase of long-term care insurance. For
certain clients, the premiums may be
partially or fully deductible. Please call
me if you are interested.
This year-end tax-planning letter is
intended only to serve as a general
guideline. If you have questions specific
to your situation, please call or email me.
Happy Holidays,
Neil C. Arbor, CPA MST |
