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Year End Tax Update
November 6, 2009
Year-end tax planning is now more important than ever as the end of 2009 approaches. There have been significant changes in the tax law that can benefit many taxpayers but actions must be taken before year end to be advantageous. Additionally, by simply managing income recognition and deduction timing between 2009 and 2010, you can save significant tax dollars.
Recent tax legislation has given tax breaks to taxpayers in order to stimulate the economy. However, without Congressional support, many of these deductions and credits will expire at the end of the year.
For individual taxpayers, the provisions expiring at December 31, 2009 include:
- The itemized state and local sales tax deduction
- The above-the-line deductions for qualified higher education expenses
- The additional standard deduction for real property taxes
- The above-the-line teachers' classroom expense deduction
- Qualified charitable distributions from IRAs
For businesses, the temporary provisions for bonus depreciation and the enhanced Section 179 expense, which were designed to encourage capital expenditures, are set to expire at the end of the year. Furthermore, qualified leasehold improvements and qualified restaurant and retail improvements will no longer be eligible for the 15-year write-off period. Additionally, the research tax credit will also expire without an extension from Congress. Thus, in order to take advantage of these deductions, you may want to consider accelerating any plans to make fixed asset acquisitions to 2009.
For the last several years, Congress has voted in last minute legislation to adjust the exemption amount for alternative minimum tax. The problem lies in the fact that the original law does not specify that the AMT exemption be indexed annually for inflation. Each year Congress passes an "AMT patch" that fixes the problem for the year. As part of the American Recovery and Reinvestment Act of 2009, Congress addressed the 2009 AMT exemption amounts; however, the exemption amounts are scheduled to fall again for 2010, which would subject millions of taxpayers to alternative minimum tax.
Effective tax planning not only entails current year strategies but also should include looking forward to 2010. There is an expectation that tax rates are on the increase; so, contrary to traditional tax planning, it may be beneficial to accelerate taxable income rather than to defer it to take advantage of the currently lower tax rates.
The following is a list of ideas that you should keep in mind when tax planning with your 415 Group advisor:
- In 2010, taxpayers can convert any IRA into a Roth IRA without the income restrictions that applied in previous years. Additionally, the taxable amount on the conversion can be recognized ratably in 2011 and 2012. However, due to the low values in the IRAs currently, some taxpayers may find it beneficial to convert to a Roth IRA before the end of 2009.
- The new tax laws allow for numerous energy credits for both homeowners and business owners.
- If you have purchased a qualified motor vehicle before the end of the year, you can claim an additional standard deduction for some state and local sales and excise taxes.
- For 2009 and 2010, the Hope Scholarship Credit is replaced by a more generous American Opportunity Credit.
- For S-Corporations, in 2009 and 2010, no tax is imposed on the net unrecognized built-in gains if the seventh tax year in the corporation's 10-year recognition period is past.
- The Work Opportunity Credit has been expanded to include unemployed veterans and disconnected youth who begin work during 2009 and 2010.
- In 2010, for high income individuals, there will not be a phase out of the personal exemption nor will there be an income-based limitation on most itemized deductions.
- Maximize contributions to your FSA or HSA plans.
- If you own an interest in a partnership or S-corporation, consider increasing your basis in the entity so that you can deduct any loss arising from it.
- Consider minimizing gift and estate tax by maximizing the annual gift tax exclusion amount - currently $13,000 for 2009.
- If you have placed a building into service in 2009, consider a cost segregation study to allow for accelerated depreciation.
Additionally, you can find more planning strategies and information in our Tax Guide Online on our website. Also visit the 415 Group website to discover a host of financial tools and calculators.
These are just a few ideas to help you plan. Not all of the above suggestions may apply in your circumstances, but you may benefit from many of them. Please contact your advisor here at the 415 Group at (330) 492-0094 to schedule a review of your tax situation. It is an investment in time well worth considering.
by: Kathleen S. Krohn, CPA
