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Year End Tax Tips 2009
In this age of expiring tax laws, one-year patches, and 11th hour bill passages, financial planning becomes an exercise in either conjecture or immediacy. One way to deal with the uncertainty is to try to guess what Congress will do and plan for that set of circumstances. Another is to throw up your hands, admit you don’t know what the future holds, and plan no further out than next month. With the ever changing landscape we recommend checking in with your representatives regularly. It is also crucial to review activities that should be accomplished before year-end. Here’s what important for 2009.
Special tax Break for Purchasers of New Vehicles: Congress wants you to purchase a new car or truck to help revive the U.S. economy. To encourage new vehicle sales, the American Recovery and Reinvestment Act of 2009 provide a deduction for state and local sales and use taxes. However, the deduction is temporary so you will need to purchase a new vehicle this year to take advantage of the tax savings.
The temporary deduction can be claimed by taxpayers regardless of whether they itemize their deductions or take the standard deduction. Taxpayers who itemize deductions and deduct state and local income taxes can also deduct the new car purchase above-the-line. Taxpayers who deduct state and local general sales taxes as an itemized deduction cannot "double-dip" and take the above-the-line deduction for new car sale taxes. While loosely described -- even by the IRS -- as above-the-line, technically, the new deduction is an increase in the standard deduction. As such, it does not reduce adjusted gross income, which is used to limit certain other deductions.
Taxpayers can deduct state and local sales and use taxes paid on the first $49,500 of the purchase price of the new vehicle. . In addition to cars, SUVs, light trucks, motorcycles, and mobile homes qualify as new vehicles. Leased vehicles do not qualify for the deduction. Used vehicles also do not qualify for the deduction. New hybrid vehicles, on the other hand, may entitle you not only to the new vehicle sales tax deduction but also to an alternative motor vehicle tax credit.
As we mentioned, the deduction is temporary. The new vehicle must be purchased after February 16, 2009, and before January 1, 2010. You do not have to purchase a 2009 model vehicle. A 2008 vehicle will qualify as long as it is new and you are the first-time user, the IRS has indicated.
There are also important income limitations. The deduction is phased out for single individuals whose modified adjusted gross income (AGI) is between $125,000 and $135,000 and for married couples filing jointly whose modified AGI is between $250,000 and $260,000.
Additionally, taxpayers will not benefit from the deduction until they file their 2009 income tax returns in 2010. In other words, taxpayers cannot retroactively treat the vehicle purchase as being made on December 31, 2008 and claim the deduction on their 2008 return. The IRS allows this special treatment for the first-time homebuyer tax credit but not for the new vehicle deduction.
Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2009 is $5,000. Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2009, the AGI phase-out range for deductibility of IRA contributions is between $55,000 and $65,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.
In addition, an individual will not be considered an “active participant” in an employer plan simply because the individual's spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $166,000 to $176,000 for 2009. Above this range, no deduction is allowed.
401(k) Contribution: The §401(k) elective deferral limit is $16,500 for 2009. If your 401(k) plan has been amended to allow for catch-up contributions for 2009 and you will be 50 years old by December 31, 2009, you may contribute an additional $5,500 to your 401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).
SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $11,500 for 2009. If your SIMPLE plan has been amended to allow for catch-up contributions for 2009 and you will be 50 years old by December 31, 2009, you may contribute an additional $2,500.
Catch-Up Contributions for Other Plans: If you will be 50 years old by December 31, 2009, you also may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.
Saver's Credit: A nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. For 2009, only taxpayers filing joint returns with AGI of $53,000 or less, head of household returns with AGI of $39,750 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $26,500 or less, are eligible for the credit. The amount of the credit is equal to the applicable percentage (10% to 50%, based on filing status and AGI) of qualified retirement savings contributions up to $2,000.
First-Time Homebuyer Credit Expands. Homebuyers who purchase in 2009 can get a credit of up to $8,000 with no payback requirement. If you’re planning to buy a home very soon: The $8,000 first-time homebuyer has been extended to June 2010 as long as a binding contract is signed by April 2010. Previously, the first-time homebuyer credit was set to expire Nov. 30, 2009. The program has been expanded to include a $6,500 credit for homeowners who buy a new place after living in their current home at least five years. The credit applies to a principal residence only and is claimed using Form 5405.
Energy Efficiency and Renewable Energy Incentives: See what individuals can do to reap tax rewards. Green tax incentives: The American Recovery and Reinvestment Act also provide tax incentives for energy-efficient investments for the home. The new law increases the credit rate of 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in services in 2009 and 2010. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
Health Coverage Tax Credit: The credit increases from 65 percent to 80 percent of qualified health insurance premiums, and more people are eligible.
Medical Deductions: Keep track of your reimbursed medical expenses all year long. You can deduct them only if they exceed 7.5% of your AGI. If you think you’re close to the 7.5% requirement, consider having an elective or necessary procedure before the end of the year. (Be sure to check that it’s among the qualifying deductible expenses). Be sure to consult with your physician before deciding to have a procedure done.
Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2009 even though you will not pay the bill until 2010. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year.
Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale. To avoid capital gains, you may want to consider giving appreciated property to charity.
Regarding charitable contribution please remember the following rules:
(1) No deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better
(2) The IRS may deny a deduction for any item with minimal monetary value
(3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return.
Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.
The ability to distribute to charity up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 701/2 continues into 2009. Ordinarily, such distributions would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on charitable contribution deductions. Starting early will afford you time to prepare and ensure that you are taking full advantage of every eligible tax break. Consult your representative to map out strategies to help maximize your deductions and credits before 2009 draws to a close.
State Taxes: If you anticipate a state income tax liability for 2010 and plan to make an estimated payment, consider making the payment before the end of 2009.
Note that in 2008, you can elect to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.
New for 2008, taxpayers who do not itemize their deductions can deduct up to $1,000 if filing jointly or up to $500 for single taxpayers for property taxes. This benefit is in the form of an additional standard deduction.
Deferring Income to 2010:
If you expect your AGI to be higher in 2009 than in 2010, or if you anticipate being in the same or a higher tax bracket in 2009, you may benefit by deferring income into 2010. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Deferring income could be disadvantageous if your deferred income is subject to § 409A, thus making the income includible in gross income and subject to additional tax.
Some ways to defer income include:
Delay Billing: If you are self-employed, delay year-end billing to clients so that payments will not be received until 2010.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
Check investment gains and losses: If you have depreciated investments in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you’ve realized this year. Also, keep in mind that if you are in the 10-15 percent income tax bracket, the current tax rate for long term capital gains is zero percent and will stay there through 2010. If you have capital loss carryover from 2008, you can use this to offset any capital gains you’ve realized this year too.
Accelerating Income into 2009: In limited circumstances, you may benefit by accelerating income into 2009. For example, you may anticipate being in a higher tax bracket in 2010, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years.
Note however that accelerating income into 2009 will be disadvantageous if you expect to be in the same or lower tax bracket for 2010. In any event, before you decide to implement this strategy, we should “crunch the numbers.”
If accelerating income will be beneficial, here are some ways to accomplish this:
Accelerate Collection of Accounts Receivable: If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection before the end of 2009. Also see if some of your clients or customers might be willing to pay for January 2010 goods or services in advance. Any income received using these steps will shift income from 2010 to 2009.
Year-End Bonuses: If your employer generally pays year-end bonuses after the end of the current year, ask to have your bonus paid to you before the beginning of 2010.
Retirement Plan Distributions: If you are over age 59 1/2 and you participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2010.
You may also want to consider making a Roth IRA rollover distribution, as discussed above.
Unwanted RMDs may still be rolled over: The Worker, Retiree, and Employer Recovery Act of 2008—signed on Dec. 23, 2008—waived required minimum distributions for 2009 only. For most of you over 70 1/2, this means the annual December requirement of withdrawing the necessary funds from your IRA (or donating them to charity) is optional. If you received an unwanted RMD earlier in the year you may be able to roll those over into your qualified plan or IRA. For more information please contact us.
Deduction Planning for Individual Deductions
Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status.
If you are a cash-method taxpayer, remember to keep the following in mind:
Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid.
Payment by Check: Date checks before the end of the year and mail them before January 1, 2010.
Promise to Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2009, you can take the deduction even though you won't pay your credit card bill until 2010.
If you’ve been unemployed in 2009: Under the American Recovery and Reinvestment Act, the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable.
Credit for higher education expenses: The American Opportunity Credit of up to $2,500 may be claimed for college expenses paid in 2009. The credit is 100% of expenses up to $2,000, plus 25% of the next $2,000 in expenses, and applies to all four years of college, unlike the previous Hope credit, which applied to the first two years. The credit phases out for joint filers with MAGI of $160,000 to $180,000, and for individuals with MAGI of $80,000 to $90, 000.
If you have any questions, please do not hesitate to call. We would be happy to meet with you at your convenience to discuss the strategies outlined above. There is still time to implement these strategies to minimize your 2009 tax liability.
