Tax Year In Review and Year-End Planning

There has been lots of talk about taxes in Congress since the Stimulus bill was passed early this year, but nothing got enacted until this month. Even so, the new Act didn’t provide us with the significant changes we continue to anticipate with healthcare reform or other proposals. Nevertheless, the Act’s new provisions and several important year-end planning reminders are worth some discussion. We would also like to remind you of a few provisions that are set to expire soon assuming Congress fails to act.

Homebuyer Credit: The Act passed this month expands the first-time homebuyer credit and now certain people are eligible for a credit even if their home purchase is not their first.

• Extends Deadline for Purchasing Home: New deadline for the first-time homebuyer credit (up to $8,000) is generally April 30, 2010.
• No Longer Just For First-Time Homebuyers: Long-time homeowners purchasing a replacement home can take a credit of up to $6,500 ($3,250 if married filing separately) if they have lived in the same primary residence for any five consecutive years of the previous eight years.
• Raises Income Limitation for Eligible Homebuyers: Eligibility begins to phase out for individuals with AGIs of $125,000 ($225,000 for joint filers), up from $75,000 ($150,000 for joint filers) when homes are purchased after November 6, 2009. Original AGI limits still apply before November 7, 2009.
• Other Rules: Recapture applies if new home is disposed within 3 years. Dependents are not eligible. ’09 purchases can be claimed on ’08 returns and ’10 purchases can be claimed on ’09 returns. This is a refundable credit. Call our office for more caveats if this credit could apply to you.
• Georgia Single-Family Residence Credit: Georgia provides a tax credit of up to $1,800 for certain taxpayers who purchase eligible residences between June 1, 2009 and November 30, 2009. The law is more complicated than the federal and it is uncertain if the April 30, 2010 extension applies at this time.

Net Operating Loss Carry Back Rules Extended/Expanded: The new election to carry back 2008 business losses up to 5 years and get refunds of taxes paid in prior years now applies to 2009 losses. All businesses (not just small ones with $15 million or less in gross receipts) are eligible, but only the small businesses are eligible to carry back both 2008 and 2009 losses. If your business is in a loss position for 2009, consider the 50% bonus depreciation deduction discussed below to increase the loss if additional refunds of prior tax can be garnered.

Waiver of Required Minimum Distributions in 2009 ONLY: If you have reached age 70-1/2, or you are a beneficiary of an IRA or employer-sponsored plan whose owner has passed away, you are not required to take an IRA distribution otherwise due in 2009. The required minimum distributions come back in 2010.

Estate and Gift Tax Planning: If someone dies in 2009, generally $3.5 million of asset value in the estate is not subject to estate taxes. The federal estate tax is scheduled to be repealed in 2010 and then reinstated in 2011 with only $1 million of asset value exempt from tax. Congress will probably act before the repeal takes place for 2010 and likely extend the $3.5 million exemption to 2010. Therefore, we recommend that you still plan to avoid or minimize the federal estate tax as part of your overall tax planning strategy. You can consider making annual gifts to reduce your estate and take advantage of the annual gift tax exclusion of $13,000 per donee. Also, with overall asset values on the low side right now due to the economic situation, now may be a good time to give away discounted assets and use up some or all of your $1 million lifetime gift exclusion.

Is Converting your “Traditional IRA” to a “Roth IRA” Something to Consider?: Unlike traditional IRAs, contributions to a Roth IRA are not deductible, but distributions down the road are not taxable. In 2009, you can convert (rollover) your traditional IRA into a Roth IRA if your AGI is $100,000 or less. You will pay tax on the conversion, which might be more palatable this year if your tax rate is unusually low and you expect solid appreciation in the IRA’s value. Starting in 2010, the income limitation for Roth IRAs is removed, so everybody is eligible to convert to a Roth. If you convert in 2010, you can choose to spread the taxes over 2011 and 2012. This situation for 2010 might make a deductible (or even a non-deductible) contribution in 2009 more beneficial if followed by a conversion in 2010. But caution, there are traps to consider.

Reminder of Some Tax Deductions and Credits for 2009:

• New Vehicle Sales Tax Deduction – Through the end of 2009, sales tax paid on the purchase of qualified new vehicles can be deducted even if you do not itemize deductions or even if you claim state income taxes as itemized deductions. Max price tag: $49,500. AGI phase out: $125k ($250k joint).
• HOPE Education Credit – For 2009 and 2010, the HOPE college credit has increased to a maximum of $2,500, applies to all four years of college, includes more qualifying expenses, increased the phase out starting at AGI of $80,000 ($160,000 filing jointly), and provides 40% as a refundable credit.
• Business Fixed Assets – The 50% bonus depreciation and the improved Section 179 expensing (up to $250k) deduction for certain fixed asset acquisitions in effect in 2008 also applies in 2009.
• For the Unemployed – For 2009, up to $2,400 of unemployment compensation is tax-free. Also, certain unemployed individuals can have 65% of their COBRA insurance subsidized for up to nine months.
• Worker Tax Credits – Working individuals will receive tax credits in 2009 and 2010 up to $400 ($800 joint filers). Businesses can get credits for hiring targeted individuals, up to $2,400 per employee.
• Energy Credits – Thirty percent of qualifying residential energy-saving improvements made in 2009 and 2010 can be claimed as a credit, up to $1,500 (total) for most improvements with no maximum for certain improvements. No AGI limits. To take the credit for 2009, the property must be installed in 2009. Also, there is a host of new energy-efficient vehicles eligible for tax credits if purchased in 2009.
• Georgia Private School Windfall – A contribution to a qualifying SSO can give the donee not only a dollar-for-dollar tax credit on an individual’s or corporation’s Georgia tax return, but also might provide a federal charitable tax deduction. Thus, the tax benefits might actually exceed the cash outlay. Anyone can participate; you do not have to have children in private school. There are limitations and strict guidelines to follow, and immediate action is required. Call us ASAP for details.

Tax Benefits Scheduled to Expire at the End of 2009:

In the past, the tax breaks below have been extended before they actually expired. However, given the current deficit situation, we can’t know at this time if Congress will extend any of these provisions beyond 2009:

• School Teachers’ Deduction (up to $250) for Certain School Supplies
• Deduction for State and Local Sales Tax
• Deduction (up to $4,000) for Qualified Higher Education Expenses
• Real Property Tax Standard Deduction for Non-Itemizers
• Qualifying Tax-Free Transfers from IRAs to Charities for Those at Least 70 ½
• Higher Alternative Minimum Tax (AMT) Exemption Thresholds
• Offsetting Non-Refundable Personal Tax Credits against AMT Liability
• Increased Charitable Deduction Limits for Qualifying Conservation Easements
• Research Tax Credit
• Credit (up to $4,000) for certain wages paid to reservists called to active duty
• 15-Year Write-Off Period for Qualified Leasehold Improvement Property, Restaurant Property, and Retail Space Improvement Property

Year-End Planning Tips to Consider: There are many ways to reduce taxable income for the year or increase deductible expenses. However, take into consideration your 2009 tax rate and your potential tax rate in future years. With the uncertainty of 2010 income tax rates (although conventional wisdom indicates no changes until 2011), it might not be beneficial to postpone taxable income. Nevertheless, here are a few ideas on how to postpone income recognition or shift expenses from one year to another:

• If you have a cash basis business, you can defer income to 2010 by delaying the year-end billing until 2010. If you receive a check in 2009, the delay in depositing the check does not defer the income.
• Accelerating deductions into 2009 that are “above-the-line” deductions could reduce your taxable income and also reduce your AGI low enough to qualify you for some other tax benefits. Some of the “above-the-line” deductions to consider are: deductible IRA, deductible moving expenses, qualified student loan interest and tuition deductions and deductible alimony.
• It could be beneficial to “bunch” some itemized deductions to produce an optimal tax benefit. The easiest deductions to shift from one tax year to another are charitable contributions, state and local taxes, medical expenses and your January home mortgage interest payment.
• If you participate in a cafeteria or flexible savings account plan, keep in mind that you have until December 31, 2009 (or March 15, 2010 if your employer plan so permits) to clean out the account with reimbursements for qualified expenditures before the funds are lost.
Consider paying your state and local income taxes (fourth quarter estimates and expected 2009 balances due) before 2010 to potentially receive a tax benefit on the 2009 tax return. Caution: AMT impact.
• Investors should keep in mind that up to $3k of capital losses are available against ordinary income. If you have capital loss carryovers and unrealized capital gains, you might be able to diversify tax-free by utilizing the loss carryovers. Also, watch the dividend trap when investing in mutual funds at year-end which could effectively convert a return of your investment into a taxable distribution.

There are limitations and special rules on many of these new tax laws and year-end tax planning tips. If you would like to discuss your specific situation in more detail, please call us to go over planning opportunities. As always we will continue to monitor, on your behalf, tax law legislation, including ones that will evolve from the healthcare reform proposals and case law.

Pursuant to IRS Circular 230 disclosure requirements, please be advised that any written tax advice or information contained herein is not intended to be used to avoid any penalty imposed by a taxing authority, nor may the recipient of this document use such information for that purpose. Please contact us with any questions regarding this disclosure.