Year-End Tax Planning

William Harmatuk, CPA (Oct, 2009)

Although year end tax and financial planning should be considered throughout the year, it is extremely important to analyze your specific needs and implement the tax strategies before year-end. With only a few months remaining in the 2009 calendar year, we will discuss some ideas you may want to consider. First, it is important to analyze two years at the same time. This will allow you to reduce your total taxes instead of shifting a tax burden from one year to the next. This is a difficult concept because of the uncertainty of the future tax structures. 

There are four basic elements to year-end planning. They are to either accelerate income or expenses, or defer income or expenses based on your 2009 and 2010 taxable income brackets. 

PERSONAL TAX FOCUS
In order to determine the impact of these four different strategies, it is advisable to review the chart below to determine what tax bracket applies to you based on your filing status and the timing of your income and expenses.

Here are some personal tax facts you should know for 2009:

  • The 2009 standard deduction amounts are: single filers - $5,700, head of households - $8,350, joint filers and surviving spouses - $11,400, and married filing separate - $5,700. In addition, for those who are age 65 or older or blind, an additional deduction is allowed of $1,400 for single and head of household filers and $1,100 for married individuals and surviving spouses. Each additional deduction is allowed for anyone who is 65 or older or blind.
  • If you don't itemize in 2009, you will have the opportunity to take an additional standard deduction for real estate taxes paid. This additional deduction is the lesser of: (a) the amount allowable as an itemized deduction or (b) $500 ($1,000 if filing a joint return). The additional deduction is added to your standard deduction.
  • You can claim an exemption for yourself, your spouse and your dependent children. The exemption amount for 2009 is $3,650. However, if your adjusted gross income is more than $166,800 for a single taxpayer, $208,500 for a head of household, $250,200 for a married filing joint couple or $125,100 for a person filing as married filing separate, your exemption amount will be reduced. The phase out rule for the exemption will not apply in 2010.
  • If you are thinking about contributing stock to a charity and the value has decreased due to the financial market, you may want to consider selling it first to capture the capital loss for tax purposes and then contributing the proceeds. By doing so you will increase your tax benefit.
  • For taxpayers that are age 70 ½ or older, the required minimum distribution (RMD) can be postponed for the 2009 tax year from employer-sponsored plans and traditional individual retirement accounts. If this tax law change applies to you, it may assist in minimizing your taxable income. 
  • If you owned a vacation home in 2009 and rented it out, you will need to determine the number of days rented and days used personally. If your personal use exceeds the greater of 14 days or 10% of rental days, the home will be treated as a personal residence. Otherwise, it will be treated as a rental property. The expenses related to the property will be treated differently based on the classification of the property. We can help you determine how many days of either use may be necessary to maximize your deductions.
  • If you have collected unemployment compensation in 2009, only the amount greater than $2,400 will be taxable.
  • For 2009, sales and excise taxes that you paid on a qualified motor vehicle purchased between February 16, 2009 and before January 1, 2010 costing up to $49,500 may be deducted. In addition, this deduction qualifies as an AMT deduction, however, income phase out limitations apply.
  • If you make improvements to your principal residence during 2009 or 2010 you will be entitled to receive a tax credit up to $1,500 by installing energy efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans to your home. The maximum credit is the lesser of 30% of the purchase price of the improvements or $1,500. The credit also can be applied against the AMT tax. If Congress does not change the rules in 2010 you will not be able to offset your AMT tax by this credit.
  • For 2009, the American Opportunity Tax credit has replaced the Hope Scholarship Credit and allows a credit for each eligible student in your family. The maximum credit is $2,500 for qualifying tuition and related expenses for the first four years of post-secondary education of which 100% of the first $2,000 and 25% of the next $2,000 is allowed. In addition, up to 40% of the credit may be refundable. However, this credit is phased out based on income limitations so please consult one of our tax advisors. The Lifetime Learning Tax Credit is still available at 20% of the first $10,000 of qualified tuition and related expenses paid to improve or acquire job skills, or for undergraduate or graduate coursework. Neither credit is allowed for married filing separate taxpayers.
  • There has been a great deal of press on the first time home buyer credit that is available until December 1, 2009. A first time home buyer is anyone who has not owned a principal residence in the United States for three years before the purchase. The refundable credit is limited to the lesser of $8,000 ($4,000 for married filing separate) or 10% of the purchase price of the home.
  • There are incentives to convert traditional IRAs into Roth IRAs in 2010 so please consult one of our many advisors.

BUSINESS TAX FOCUS
Below is a chart to help determine what tax bracket applies to you based on your corporate income

  • Here are some corporate tax facts you should know for 2009:
  • For a tax year that begins in 2009 or 2010, no S corporation "built-in" gains tax will be imposed on the corporation if the tax year is after the 7th tax year that the S corporation election is in effect.
  • If your business is on a fiscal year beginning in 2008 and ending in 2009 and has incurred a loss, you should consider a one-time opportunity to carry back the net operating loss 5 years. 
  • Qualified dividends paid out of C corporation earnings will be taxed at a maximum rate of 15% through 2010.
  • Section 179 expensing election for qualified section 179 property you place in service in 2009 remains at $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). You cannot expense more than your taxable income. The maximum Section 179 limit is reduced, dollar for dollar, by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. 
  • The total depreciation deduction for business vehicles (including the section 179 expense) allowed for a passenger automobile, not a truck or van, placed in service in 2009 is $2,960 ($10,960 for automobiles including the special depreciation allowance). The maximum depreciation deduction allowed for a truck or van used for business purposes placed in service in 2009 is $3,060 ($11,060 for trucks or vans including the special depreciation allowance). If it is a sport utility vehicle with a gross vehicle weight rating greater than 6,000 pounds the section 179 deduction is limited to $25,000. These limits are reduced if the business use of the vehicle is less than 100%.
  • For maximum contributions to retirement plans in 2009:
  1. Simple plan employee limits - $11,500 (excluding catch-up contributions of $2,500). 
  2. 401(k), 403(b) and 457 plan employee limits – elective contributions of $16,500 (excluding catch-up contributions of $5,500).
  3. Total combined deferred contribution limit - $49,000, the maximum compensation used for determining contributions is $245,000.
  4. Defined benefit plan limits - $195,000 or 100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
  5. Roth, traditional and non-traditional IRA limits - $5,000 (excluding catch-up contributions of $1,000). Income phase outs can apply so please consult one of our many tax advisors.
  • For 2009 the standard mileage rates have changed, the rates per mile for business is 55 cents, medical and move related is 24 cents and charitable related mileage remains 14 cents.

These are only a few of the many planning strategies available and we realize that this can be quite overwhelming so we suggest that you consult your Dermody, Burke and Brown advisor to maximize and implement your year-end tax planning strategies.

 

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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