2009-2010 Tax Planning Strategies

What’s New for 2009

The first time home-buyer credit is extended through April 30, 2010. Binding sales contracts signed by April 30, 2010, must close by June 30, 2010 to qualify for the credit. Homes costing over $800K and those bought from relatives don't qualify if purchased after Nov 6, 2009. Credits for 2009 purchases can go on 2008 amended returns. Credits for 2010 can go on 2009 amended returns.

You don’t have to be installing solar panels to be eligible for a tax credit of up to $1,500 for energy efficiency. These credits are available for much less exotic items such as windows and doors, insulation, roofs, and water heaters, to name a few. To learn more, go to http://www.energystar.gov/ and click on “Tax Credits for Energy Efficiency”.

New-car sales tax deduction: You can deduct state and local sales tax paid on a new set of wheels purchased by Dec. 31, even if you do not itemize. The deduction is limited to the first $49,500 of a vehicle's price, and the break begins to phase out for singles with modified adjusted gross income of $125,000, or couples with $250,000.

Businesses should consider purchasing assets before 12/31: Congress extended the 50% first-year bonus depreciation through 2009. For vehicles to qualify for bonus depreciation they must be used more than 50% for business. The limit on first-year depreciation for new automobiles that qualify for bonus depreciation has increased from $3,060 to $11,060. The limit for used vehicles remains at $3,060. Also extended through 2009 are the expanded net operating loss carry-backs for small businesses.

The American Opportunity Education Credit has expanded the Hope Education credit. It covers up to 4 years of postsecondary education (up from 2) and the maximum credit is $2,500 (up from $1,800) and includes books, as well as tuition and fees. For tax-free distributions from 529 Plans, the definition of “qualified expenses” is expanded to include computers, computer technology, and internet service.

IRA and plan withdrawals: If you turned 70-1/2 in 2009, the distribution requirement is waived until 2010.

Reminders

If you are at or below the 15% tax bracket, long term capital gains and qualified dividends are not taxed. To qualify, your taxable income must be less than $32,550 for single filers, $65,100 for joint filers. Once your taxable income exceeds these limits, the 15% rate starts to apply. Even if you had no capital gains, it may be to your advantage to unload some losses. You can claim up to $3,000 in capital losses against ordinary income. The rest can be used on future tax returns. Given the zero rate on capital gains, you might think it a good idea for your children to sell investments. Be careful. Kiddie tax applies to children through age 18 and through age 23 if they are full-time students. That means their investment income above $1,800 is taxed at the parents’ top rate.

The business mileage rate for 2009 is 55 cents. The mileage rate for medical or moving expenses is 24 cents. The rate for charitable miles remains at 14 cents. If you donate a vehicle to a charity and claim more than $500 deduction, you must attach to your return a statement from the charity that identifies you, the vehicle, date of donation, vehicle sale date, and sales proceeds. You need to get a receipt for each donation – not just those over $250. Instead of putting cash into the collection plate, you need to use a check or a card swipe so you and the organization have records. Check your withholding and estimated tax payments against your projected taxable income. Adjust as needed to avoid underpayment penalties.

Tax Planning Basics

As always, the key to smart end-of-year tax planning is to look at two tax years – 2009 and 2010 – as you study your options. For most taxpayers, the best strategy is also the simplest: Defer income to the following year and accelerate deductions into the current year. This strategy takes advantage of the fact that income levels for tax brackets increase each year for inflation. But there are some exceptions: Taxpayers expecting to be in a higher tax bracket next year will maximize deductions next year, not this year.

Gaming the Standard Deduction: If you find that, try as you might, your itemized deductions fall a little short of the standard deduction amount, you may be able to delay taking some of them so that you may itemize in 2010. This year, the standard deduction is marrieds: $11,400, plus $1,100 if age 65+, singles: $5,700, plus $1,400 if age 65+, and household heads: $8,350, plus $1,400 if age 65+. To maximize deductions in odd years (like 2009) you could prepay (in December) your January mortgage payment, 2nd installment property taxes, 4th-quarter estimated state taxes, and some portion of the following year’s alimony. See doctors, dentists, accountants, etc. in the months of January and December, make two years’ worth of charitable gifts, and skip these in even years. Consider getting and paying for elective medical procedures in 2009 if you are near the 7-1/2%-of-AGI threshold. This does not include expenses for non-reconstructive cosmetic surgery. An even better option is available to taxpayers covered by high-deductible health insurance plans: the Health Savings Account, to which you may make tax-free contributions for non-reimbursed medical expenses, and which are not subject to the “use it or lose it” rules at the year end or upon changing jobs.

The AMT: Initially designed to target a small group of high-income people who were not paying any taxes, the AMT has expanded to include an increasingly large swath of people who earn at least $100,000. State and local taxes, real estate taxes, employee business expenses, tax accounting fees and attorney fees are not deductible under AMT. If you expect to be paying AMT in 2009, you want to postpone deductions to 2010 and accelerate ordinary income and short-term capital gains into 2009. You may also want to lower your income by investing the maximum in tax-deferred retirement plans - see “Saving for Retirement” at http://MesaTaxes.com/resources.html.

A final note on client data security and business mobility:

My heartfelt thanks to all clients who were understanding and tolerant of having to file extensions last April when I was called back East for a family emergency. Never again will such an inconvenience be necessary. I have added laptop and data security features to make Mesa Taxes a mobile business.