2009 Yearend Tax Newsletter

No doubt this has been one of the busiest years in tax history for Congress.  The result of some of the recent legislation was shown in a study published by The Tax Policy Center on June 29^th indicating that 47% of all Americans will pay no federal income tax this year.  This percentage is higher in some population segments; 55% of the elderly and 72% of single parents will pay no tax.  Most likely these numbers have increased further after more tax breaks were passed on November 6^th.  As of today, $40 billion in tax breaks have been passed for the years 2010 – 2011.  There is a huge amount I could write about but assuming you don’t enjoy reading the tax code, I’ve included some topics that might interest you, along with some yearend tax tips.  If you see a topic that applies to you and would like more information on it, please let me know and I’ll get that right out to you.

According to the Kiplinger Tax Letter, the IRS will “grow by leaps and bounds as it puts a slew of tax changes related to health care into effect and sets up systems to enforce the rules. How well the IRS can handle this increased workload hinges on whether lawmakers are willing to give the OK to billions more in agency funding for years to come…  Many in Congress worry IRS won’t be up to the task, even with extra funds.The concern: The Service is being asked to manage a huge social welfare program…something that agency staff have no experience with and have not been trained for.”  Right now they miss over $10 million a year in bogus earned income credit claims. 

New Tax Laws For Individuals:

Sales tax deduction on new vehicles – Taxpayers can deduct the sales tax on new vehicles even if they don’t itemize their deductions.  Motor homes also qualify.  (2009)

Tuition Expenses – Distributions from 529 plans can now be used to purchase computer equipment, Internet access, and related services while enrolled as a student. (2009 & 2010)

Unemployment Compensation – The new law excludes up to $2,400 in unemployment compensation from taxable income. (2009)

Qualifying Child Definition has permanently changed – This will mostly affect divorced individuals with children.  Your child now qualifies for the child tax credit only if you can and do claim an exemption for him or her.

Tax Loophole Gone – Previously, if you moved into your 2^nd home or previously rented-out home, and provided you lived in it for two years, you could sell that home and exclude up to $500,000 of the gain.   With the new law, the sale of your main home that was previously a second home or rental property is no longer excludable from income if you made it your primary home after January 1, 2008.

Credits:

First-Time Homebuyer Credit - This $8,000 credit was extended on November 6^th for purchases between 11/6/09 and 4/30/09 or binding contracts executed before 5/1/10 that close before 7/1/10.  The income limits have been greatly expanded and doesn’t start phasing out until single individuals reach $125,000 and married couples, $225,000.  

Modified Long-time Homeowners Credit – A new credit of $6,500 is available for those existing homeowners who want to purchase a more expensive home.

Nonbusiness Energy Credit – A 30% credit is now available on the amount you spend on energy-saving improvements for your primary home of up to $1500 for the combined 2009 & 2010 tax years.  Some examples: high-efficiency heating & a/c units, water heaters and some types of stoves; and energy-efficient windows, skylights, doors, and insulation.  A separate 30% tax credit is available for solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property.

Earned Income Credit – The earned income credit is permanently increased for working families with three or more children and for married couples. For example, a family with three or more children and income of $48,279 or less will now be eligible to receive this credit.

Child Tax Credit – This credit was expanded. (2009-2010)

Education Credits – The Hope credit amount is increased from $1800 to $2500 per year and now lasts four years (instead of two).  Course materials have now been added to tuition as qualifying expenses.  (2009 - 2010)

New Tax Laws For Businesses:

The standard mileage rate for 2009 is 55¢ per mile.  Beginning 1/1/10 this will decrease to 50¢ per mile.

Extended NOL carryback for all businesses – This was expanded to allow businesses to carryback net operating losses for up to five years.

Write off of assets purchased - An additional 50% of (bonus) depreciation is allowed when purchasing assets, including new vehicles.  There is also an increased amount allowed to be written off (Section 179) as expense. (2009 - 2010)

Work Opportunity Credit – Expands the work opportunity credit to cover unemployed veterans and disconnected youth hired. (2009 - 2010)

Most of these new laws and credits have limitations, so before taking advantage of any of them, be sure to give me a call to make sure you’ll qualify.

Other:

In 2009, high-income earners (couples making over $250,200, single $168,800) will only lose up to a maximum of 1/3 of their exemptions vs. 100% previously.

Further Tax Legislation that May Happen (once they’re done wrangling with Health Care):

Estate Tax – The estate tax is scheduled to disappear in 2010, but only for one year.  The tax will reappear in 2011 with the exemption being reduced from $3.5 million to $1 million and the maximum rate increasing from 45% to 55%.  There is an expectation that Congress will intervene before this happens.

Other tax breaks that will expire on 12/31/09 if Congress doesn’t jump in: write-offs for state sales tax, college tuition and teachers’ supplies.

Tax Planning Tips:

Look at Both Years:  The goal is to cut your total tax bill over both years, not just one.  Most filers will benefit by accelerating their deductions from 2010 into 2009 and deferring income until 2010. But if you expect to be in a higher tax bracket in 2010, consider the reverse…accelerating income and delaying deductions. Income tax rates aren’t scheduled to change in 2010, but the Bush tax cuts are set to lapse after 2010, raising the top rate from 35% to 39.6%. The general consensus is that Congress won’t act to accelerate that change next year, or any surtax on high-income individuals, such as the one in the House’s health care overhaul legislation.

 For individuals on the edge of itemizing, consider taking the standard deduction in one year and itemizing in the other.  Then push your itemized deductions into one year. Try these strategies:

• State Tax - Mailing your Jan. state tax estimate in Dec. (allows you to claim a deduction for the payment this year, not in 2010).

• School & Property Tax - Paying your Jan. or Feb. property or school taxes in Dec. 2009.

• Mortgage Payments - Making the Jan. 2010 mortgage payment on your residence before the end of this year (enables you to deduct the interest portion in 2009).

• Medical - Consider getting and paying for elective procedures in 2009 if you are close to or have exceeded the 7.5%-of-adjusted-gross-income threshold.
• Charity - Those planned for next year can be accelerated to this year, but you must charge them or mail checks by Dec. 31 for gifts to count for 2009. Make room for Holiday presents by cleaning out unused items and donating them to a charity. 

 Other items to consider:

• A NYS tax deduction of up to $10,000 is available for a contribution to a NYS College Savings (529) Plan.

• Making a contribution to a Roth or traditional IRA.  If you haven’t made one yet, you have until April 15^th.  If you make that decision at tax time, I can prepare your taxes under different scenarios to show you the benefit of each based on your specific tax situation.

• Check your flexible spending account balance. You must clean it out by Dec. 31 if your employer still has not adopted the 2½-month grace period that the IRS now permits. Otherwise, any money left in your account is forfeited.

• If you made more from your business or job in 2009 than you expected and are afraid enough taxes weren’t withheld, increase the withholdings on your final few paychecks.  You can even have it all go to taxes to avoid penalties.

• Capital Gains & Losses:  You may want to consider taking some of your capital losses.  You can apply them against your capital gains plus any excess up to $3,000.  Any remaining losses can be carried forward to future years when the capital gains rate will most likely be higher. Check to see if you can benefit from the special 0% rate on long-term gains and dividends. If you’re in the 10% or 15% brackets, dividends and profits on sales of assets owned for over a year are tax free until they push you into the 25% bracket. Then, the rest of your dividends and long-term gains are taxed at 15%.   If you have gains try to hold the underlying asset for at least a year, because short-term capital gains (less than a year) are taxed as ordinary income at a rate of up to 35%.

• Convert to a Roth IRA:  If you are over the income limit, you can still make a non-deductible contribution to a traditional IRA in 2009 and then convert it to a Roth in 2010.  During 2010 the ban on conversions for taxpayers making over $100,000 is gone and the tax can be deferred and spread out over two years with 50% of the conversion income taxed in 2011 and the balance in 2012.  Earnings in a Roth IRA will grow (and later may be withdrawn) tax-free.  But top bracket filers who do convert in 2010 may want to pay tax up front. With the top rate likely to go from 35% to 39.6% 2011, the conversion income would bear a greater tax if the spread were used, possibly removing the benefit of switching to a Roth.  I work with a local financial planner if you ever would like to discuss this with us.

• Max out your retirement contributions:  Though it’s much easier to do this from day one rather than trying to come up with it all at the end of the year, it’s still not too late.  For those that don’t trust the stock market, there are many other investment alternatives. 
• The annual Gift Tax Exclusion is $13,000 per year ($26,000 for husband & wife).  Medical expenses and college education payments are not included in this limit.  This is a very easy way to reduce future estate tax liability.

 For Businesses:

• Professionals can postpone their end-of-year billings to collect less in 2009. Or they can speed up billings if they expect to be in a higher tax bracket next year.  Expenses can also be shifted from one year to another to tweak net income.

• Consider delaying year-end bonuses so they aren’t taxed until 2010.

• Generally, employer retirement plans, such as 401ks, must be established by Dec. 31 to get a 2009 deduction.  For SEPs, you have until the due date for filing your return, plus any extension. That lets you deduct 2009 payins as late as Oct. 15, 2010, and gives self-employed individuals who miss other setup deadlines time to open SEP-IRAs.