Year End 2009 - IndividualsThe end of 2009 is happening upon us faster than we think. With the year drawing to a close, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your tax bill. Once December 31 passes, your 2009 tax bill is essentially set. Taking certain steps before then, however, can make a difference. By taking certain steps now, before 2009 draws to a close, you can reduce the size of your tax bill otherwise due when you file your return next year. Especially this year, when Congress has inserted a handful of powerful but temporary tax breaks to get the economy moving again, you do not want to overlook any deduction or credit that you can take in 2009 to lower this year’s tax bill. Year-end tax planning is made more urgent in 2009 because of some significant tax law changes, both those that have taken place to stimulate the economy and those now on the horizon to pay for the recovery. Many of the tax breaks in recent stimulus tax bills will expire at the end of this year. At this point, Congress cannot be counted on to extend any of them for 2010: • For individuals, these expiring provisions include the itemized state and local sales tax deduction; the $4,000 higher education tuition deduction; the additional standard deduction for real property taxes; and the above-the-line $250 teachers’ classroom expense deduction. TRADITIONAL TAX STRATEGIES Year-end tax planning tips typically fall into two general groups: (1) the traditional strategies that have proven themselves useful year after year, and (2) new opportunities and pitfalls that have arisen from recent changes to the tax laws. Tried and true tax planning techniques can help virtually every taxpayer save money; some, of course, more than others. How much you can save depends on your individual circumstances, but examination of the following general areas is worth a look --in addition to considering the tax impact of any special circumstances in which you might find yourself this year. Income shifting One of the most fundamental year-end tax planning techniques involves accelerating deductible expenses in 2009 and deferring income, if economically feasible, into 2010. By delaying taxable income you defer taxes. Delaying taxable income may also prevent you from losing lucrative tax breaks that can be reduced or eliminated altogether as your income level rises and propels you into a higher tax bracket. With only a couple of months left until the end of the year, you can probably anticipate with reasonable certainty what income and deductions you will be reporting on your 2009 tax return. You may also be able to predict with relative accuracy what your income and expenses for the first few months of 2010 will include. The ability to gauge your income and expenses for 2009 and into 2010 provides a golden opportunity to shift income or expenses into one year or the other depending on what will save you the most overall taxes. Shifting income, however, is not always a matter of simply delaying receipt of funds. Tax rules may require you to recognize certain types of income when you have earned the right to receive it, even if you arrange for its delayed payment. Our office can help you recognize and navigate the differences. First-Time Homebuyer Credit This year, qualifying taxpayers who buy a home before Dec. 1, 2009, can claim the credit on either their 2008 or 2009 tax returns. They do not have to repay the credit, provided the home remains their main home for 36 months after the purchase date. They can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately. The amount of the credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. For purposes of the credit, you are considered to be a first-time homebuyer if you, and your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase. New-car Sales Tax Deduction Purchases made before Jan. 1, 2010, will qualify for this deduction under the American Recovery & Reinvestment Act of 2009 (ARRA). The deduction is limited to the sales and excise taxes and similar fees paid on up to $49,500 of the purchase price of a new vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify. The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return. Eligible vehicles include new car, light truck, motor home and motorcycle.
Making Work Pay Tax Credit For 2009 and 2010, the making work pay credit is a $400 refundable tax credit for individuals ($800 for married filing joint) limited to 6.2% of earned income. This is subject to a phase out for modified AGI of $75,000-$95,000 ($150,000-$190,000 if married filing joint). This credit is applied to payroll automatically if you receive a paycheck and are subject to withholding. Self employed can claim on their tax return. Reduced if you are receiving economic recovery credit or government retiree credit. Not available to non-resident aliens, individuals who can be claimed as dependents on someone else’s return and estates and trusts. Nonbusiness Energy Property Credit This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count. By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result. Residential Energy Efficient Property Credit The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property. Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits. Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. How 529 Plans Help Families Save for College The American Recovery and Reinvestment Act of 2009 (ARRA) added computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the 529 plan while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. Deduction management Essential year-end tax planning requires determining whether you will take the standard deduction or whether you will itemize your deductions. Consider "bunching" deductible expenses into one or the other year depending upon whether the standard deduction may be taken in one year or whether the adjusted gross income limits for medical (7.5 percent) or miscellaneous itemized deductions (2 percent) may be more easily met. Even if you know you will itemize deductions, accelerating or deferring them is often a question of determining your probable tax bracket for year end and the next year to maximize their after tax value. Sometimes, planning is as simple as paying your state estimated tax or real estate taxes in one year or the other; at other times, it's a question of making certain you gather the right proof and follow the proper steps in time to be entitled to a deduction in one year or the other. Again, our office can help. Portfolio Timing The end of the year is the right time to examine your investments (winners and losers over the course of the year) to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses. Especially this year, when the stock market took its roller-coaster ride, gathering your portfolio's records for the entire year can make a difference in not only what you might buy or sell in November and December but what estimated tax you will need to pay (or not pay) for the fourth quarter of 2009. Long-term capital losses can be used to fully offset long-term capital gains. Losses taken in excess of gains can also be used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately). The strategy for short-term gains and losses follows a similar game plan, although coordinating the two sometimes takes special care. Unlike excess business losses that can be carried back two years to net an immediate refund in many cases, an individual's net capital losses unfortunately can only be carried forward. In calculating gains or loss for purposes of balancing your gains and losses at year end, remember that, for tax purposes, it's not how much your stocks have gone down for the year but rather have much gain or loss you've realized since purchasing them. For example, you still may owe capital gains tax on stock acquired in 2001 at $15/share even though it may have dropped $20 in 2009 from a high of $65 to $45 when you sold it. You still have capital gain of $30/share on the sale. Retirement planning Year-end planning for 2009 also involves maximizing annual contributions to your retirement plan accounts, since one year's limit cannot be added to the next year's if not taken in time. While contributions to IRAs may be applied retroactively if made before the filing deadline, an individual's elective deferral contribution made as an employee to a qualified plan must be made before the end of the calendar year. Maximizing contributions to your retirement plan (or plans) before year end also allows you to reduce your adjusted gross income in direct proportion to those contributions. This in turn can give you the benefit of increasing the deductibility of medical and other deductions subject to adjusted gross income floors. Gift-giving You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. Biking to work Another new tax break that begins 2009 is a new employer- provided transportation fringe benefit. In addition to transit passes and van pooling, employers starting in 2009 can offer their employees up to $20/month as a tax-free benefit if they commute to work by bicycle. To inaugurate this benefit starting in January, however, employers must incorporate it into their written fringe benefit plan. NEW OPPORTUNITIES Tax law changes constantly, and therefore so must individual tax planning. Tax year 2009 is no exception. While fundamental techniques should not be overlooked, attention to tax legislation is equally important for most taxpayers. Roth IRAs Effective for 2010, individuals will be able to roll over funds to a Roth IRA regardless of current income and other restrictions, the IRS reminded taxpayers in September. The IRS also issued interim guidance on rollovers from employer plans to Roth IRAs. It’s not too early to start planning for Roth IRA conversions. Please contact our office if you have any questions. Retirement savings President Obama and the IRS announced new initiatives in September to encourage Americans to save for retirement. The IRS issued seven rulings and notices to streamline automatic enrollment in retirement plans and more. Refunds Starting in 2010, taxpayers can check a box on their return to use all or part of their refund to purchase Series I U.S. savings bonds. The bonds will be mailed directly to the taxpayer. FBAR The IRS also extended temporary relief for certain filers of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), to October 15, 2009. Eligible taxpayers are taxpayers who recently learned that they had FBAR filing obligations for years prior to 2009 and taxpayers who recently learned that they have a current FBAR filing requirement for 2009 but did not have sufficient time to properly file by the June 30 due date. Taxpayers with signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts have an extended due date of June 30, 2010. Year-end tax planning is not only about what is happening in Congress and at the IRS. Addressing the changed circumstances in your life has always been a large part of year-end tax planning. What you planned for at the beginning of 2009 may not be what you are faced with now. Changes in your employment status, family, investments, or retirement plans raise new tax issues: • Self-employment, severance pay, sign-on bonuses, stock options, moving expenses, and COBRA health benefits - to name a few employment-related events - all present unique challenges. • In your personal life, marriage, divorce, a larger family, and child care or eldercare expenses arising in 2009 can impact your tax situation. • Investments, too, generally benefit from year-end tax strategies. You can take steps to balance out gains and losses. You also should take a year-end tally of dividends and interest to make certain that are paying the correct estimated tax. Working to rebuild a retirement nest egg through maximizing deductible 2009 contributions, and making certain that rollovers from former employers are done correctly, should also be a top priority at year end 2009. GIVE OUR OFFICE A CALL With the complexity of the tax law, understanding what tax planning provisions to incorporate into your year-end tax planning strategy can be a daunting task. While this letter hopefully gives you a heads up on several strategies that you might like to utilize before year end, there are many more techniques that can be used depending upon a client's individual circumstances. For a more detailed plan that can be customized to your particular circumstances, please don't hesitate to give our office a call. Sincerely yours, Patrick J Rubey
309 W Washington #350 | Chicago, IL 60606 | Tel:(312)917-1107 | Email: pjrcpa@ameritech.net |
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