Tuesday, December 22, 2009
Deferring Income, Accelerating Deductions
In most years, we typically tout the strategy of “deferring income and accelerating deductions” as a sure-fire way to plan for taxes. However, this strategy may not be the way to go for 2009, 2010 and 2011.
The reason it is usually a good one is that it is often better to pay less taxes today and use the money we saved on taxes to invest. But now we must factor in one more big unknown: what will the tax rates be in the very near future?
Most economists are predicting that long-term capital gains rates (now 15%) will increase to 20-25%, qualified dividends (now taxed at 15%) will be taxed as ordinary income, and that the top tax rate for individuals (now 35%) will increase to a minimum of 39.6%. Therefore, if you think these estimates are likely to be accurate, you may want to incur capital gains in 2009 to accelerate the taxes and pay the taxes at a lower overall rate.
If you decide to use this strategy, make sure you consider the time value of money and other investment decisions in lieu of the tax issues. In addition, you must try to determine what your likely tax bracket will be for 2010 as opposed to 2009.
It may make sense for you to accelerate income (or delay expense deductions) to 2009 from 2010 if:
(1) You expect to be in a higher tax bracket in 2010
(2) You are planning on getting married in 2010 (and may suffer from the “marriage penalty” tax hit)
(3) You will start to receive Social Security benefits in 2010 (and don’t want to have any more of these benefits taxed than is necessary)
(4) You plan on converting your traditional IRA to a Roth IRA and will thus have more income in 2010; and/or (5) you expect to be eligible for a tax credit in 2010 and there are income phase outs requiring you to keep your income as low as possible for 2010.
Finally, given the current state of the economy, many taxpayers have had debt-canceling acts in 2009. Please be sure to review any debt cancellation tax forms (1099) you may receive in early 2010 as there are likely to many mistakes in these. Given that much debt cancellation results in taxable income, this could be a costly mistake.
Tuesday, December 15, 2009
December Tax Tip
The taxable wage base for Social Security taxes (FICA) stays the same in 2010 as it was in 2009 ($106,800). While wages did go up in 2009 (however modestly), consumer prices went down.
Thus, the taxes on your earned income will stay the same because there will be NO benefit increases for Social Security recipients, the first time since they went into effect in 1975. The benefits are based upon the Consumer Price Index, which went down in value from 2008 (and thus no cost of living increases).
Wednesday, December 2, 2009
Year End Tax Planning Moves For 2009 (Part 2)
- Make tax-free gifts of up to $13,000 per recipient per year. You can do the same in early 2010 (it stays the same at $13,000 in 2010). You do not get a tax deduction for this but it does permit the gift to work for 2009. By using proper tax planning, you may be able to gift away appreciated securities to your children and have them sell the securities, thus enabling the family to pay a lower overall capital gains tax rate in 2009 or 2010 (but watch the tricky “kiddie” tax rules).
- If you bought a new home and paid mortgage insurance, the premiums are deductible in 2009 (and may not be after 2010) if your AGI is $110,000 per year or lower.
- Use up Flexible Spending Accounts, including medical accounts that may be in a “use it or lose it” status. If this is the case, purchase eyeglasses, medications, make dentist appointments, etc. to absorb the excess funds. The IRS does now permit plans to establish a 2 1/2 month extension into 2010 to use up the 2009 funds.
- Be aware that the “kiddie tax” provisions have recently changed and now apply to all children up to the age of 18 (from the prior age 14 limitations). This means that income from your children may be taxed at your higher tax bracket. To avoid this, check the investments in the child’s account and make sure that they do not produce enough current income to make this a “negative” from a tax perspective.
- Maximize the sales tax deductions. This is especially valuable in the seven states without an income tax. Rather than use IRS tables, you are permitted to use actual receipts. You also have some planning opportunities if you purchased a big-ticket item such as a vehicle or boat in 2009. Also, consider making the big-ticket purchase in 2009 to accelerate the Schedule A deduction.
- If you have large gambling winnings, you can take a trip to gamble and claim the (likely) losses as an itemized tax deduction. While we do not encourage our clients to gamble for tax reasons, this may be one instance in which you can get a reduction in the amount of taxes owed for 2009. Please be aware that you must itemize your deductions on Schedule A before you can claim these losses.
- Buy Business Assets. Businesses get a 50% bonus depreciation for assets placed into service before December 31, 2009. With proper planning and potential use of Section 179 as well, 2009 is an excellent year (from a tax perspective) to add new assets to your business operations.
- Open up and fund an IRA before year end (or at least before April 15, 2010). The types of IRAs vary and offer different current and future tax benefits depending upon the type. However, all taxpayers who have earned income in 2009 are eligible to establish one of these very favorable retirement plans and it should be a part of all taxpayers’ current year tax strategies. You can fund these accounts up to your earned income or the maximum contribution amounts ($5,000 per year for an IRA– plus an extra $1,000 if you are over age 50), whichever is less.
- Establish a Keogh plan for your business. The plan must be established on or before December 31, 2009, to be effective for 2009. You can fund the plan (if established by 12/31/09) up to the due date of the tax return.
- Hire family members home for the holidays. If you have a child in college and also operate a home-based or small business, why not hire the child to perform services for the business and claim an end-of-the-year tax deduction for any compensation paid? This also has the added benefit of shifting income to someone in a (presumably) lower tax bracket.
- Pre-pay/”bunch” expenses, including some medical expenses (to increase the amounts you can deduct after the 7.5% floor on Schedule A has been reached) and miscellaneous itemized deductions subject to the 2% floor. Please be aware that prepaying any state taxes, including income and/or property, may help with the tax deductions but may have an adverse impact on the AMT you may eventually owe. If you believe that AMT may be an issue for you, we strongly recommend that you consult with your tax professional to see if any tax planning can assist you.
- If you bought a new home and paid mortgage insurance, the premiums are deductible in 2009 (and may not be after 2010) if your AGI is $110,000 per year or lower.
- Use up Flexible Spending Accounts, including medical accounts that may be in a “use it or lose it” status. If this is the case, purchase eyeglasses, medications, make dentist appointments, etc. to absorb the excess funds. The IRS does now permit plans to establish a 2 1/2 month extension into 2010 to use up the 2009 funds.
- Be aware that the “kiddie tax” provisions have recently changed and now apply to all children up to the age of 18 (from the prior age 14 limitations). This means that income from your children may be taxed at your higher tax bracket. To avoid this, check the investments in the child’s account and make sure that they do not produce enough current income to make this a “negative” from a tax perspective.
- Maximize the sales tax deductions. This is especially valuable in the seven states without an income tax. Rather than use IRS tables, you are permitted to use actual receipts. You also have some planning opportunities if you purchased a big-ticket item such as a vehicle or boat in 2009. Also, consider making the big-ticket purchase in 2009 to accelerate the Schedule A deduction.
- If you have large gambling winnings, you can take a trip to gamble and claim the (likely) losses as an itemized tax deduction. While we do not encourage our clients to gamble for tax reasons, this may be one instance in which you can get a reduction in the amount of taxes owed for 2009. Please be aware that you must itemize your deductions on Schedule A before you can claim these losses.
- Buy Business Assets. Businesses get a 50% bonus depreciation for assets placed into service before December 31, 2009. With proper planning and potential use of Section 179 as well, 2009 is an excellent year (from a tax perspective) to add new assets to your business operations.
- Open up and fund an IRA before year end (or at least before April 15, 2010). The types of IRAs vary and offer different current and future tax benefits depending upon the type. However, all taxpayers who have earned income in 2009 are eligible to establish one of these very favorable retirement plans and it should be a part of all taxpayers’ current year tax strategies. You can fund these accounts up to your earned income or the maximum contribution amounts ($5,000 per year for an IRA– plus an extra $1,000 if you are over age 50), whichever is less.
- Establish a Keogh plan for your business. The plan must be established on or before December 31, 2009, to be effective for 2009. You can fund the plan (if established by 12/31/09) up to the due date of the tax return.
- Hire family members home for the holidays. If you have a child in college and also operate a home-based or small business, why not hire the child to perform services for the business and claim an end-of-the-year tax deduction for any compensation paid? This also has the added benefit of shifting income to someone in a (presumably) lower tax bracket.
- Pre-pay/”bunch” expenses, including some medical expenses (to increase the amounts you can deduct after the 7.5% floor on Schedule A has been reached) and miscellaneous itemized deductions subject to the 2% floor. Please be aware that prepaying any state taxes, including income and/or property, may help with the tax deductions but may have an adverse impact on the AMT you may eventually owe. If you believe that AMT may be an issue for you, we strongly recommend that you consult with your tax professional to see if any tax planning can assist you.
Tuesday, December 1, 2009
New Tax Act Passed
Congress has passed numerous tax changes in the “Worker, Homeownership and Business Assistance Act of 2009.” The following is a summary of the more prominent points of this comprehensive legislation:
- Businesses can carry back any losses from 2009 for 3, 4 or 5 years instead of the normal two-year carry back term. This should help businesses with cash flow issues. Most businesses will qualify for these new provisions. You still retain the option of waiving the carry back term and electing instead to carry the loss forward. This law currently does NOT apply to losses for 2010 but rather only for 2008 and 2009 losses. In addition, there is a 50% income limitation for losses being carried back to the fifth year. This means that the carry back loss cannot exceed 50% of the income reported in the fifth carry back year. Changes were also made to the Alternative Minimum Tax laws on these carry- back provisions to prevent the AMT from taking away what the regular tax laws now permit.
- The Act increases the amount of penalties for S corporations and partnerships which file late to $195 per partner/owner per month, up to a maximum of 12 months. This is an increase from $89 per owner per month. This provision is expected to raise over $1.1 Billion to the tax revenues.
- The first-time homebuyer provisions have been extended to May 1, 2010 (from November 30, 2009). A “first-time homebuyer” is one who had no ownership interest in a primary residence for at least three years prior to the closing on the new purchase. This is available to taxpayers with an adjusted gross income under $145,000 (single) and $245,000 (married filing joint). In addition, the taxpayer must be at least 18 years old, cannot be claimed as a dependent of another in the year of the purchase, cannot acquire the property from a related person, and must attach a copy of the closing settlement statements to the tax return in which the credit is being claimed. Finally, there are expanded rules for members of the military concerning timing and qualifications. For service members, the May 1, 2010, deadline is extended to April 30, 2011.
- There is a new provision for “long-time residents” and the purchase of a new primary residence. If you have lived in the same principal residence for at least five consecutive years out of the eight years before the new residence purchase, you will qualify. The maximum credit for this provision is $6,500 and there are no income phase-outs on this except that the home must cost less than $800,000 in order to qualify.
- The Federal Unemployment Tax Act (FUTA) rate of 6.2% has been extended for an additional one year. This amount was supposed to revert to 6% but Congress left the 0.2% surcharge in place for one additional year.
- Businesses can carry back any losses from 2009 for 3, 4 or 5 years instead of the normal two-year carry back term. This should help businesses with cash flow issues. Most businesses will qualify for these new provisions. You still retain the option of waiving the carry back term and electing instead to carry the loss forward. This law currently does NOT apply to losses for 2010 but rather only for 2008 and 2009 losses. In addition, there is a 50% income limitation for losses being carried back to the fifth year. This means that the carry back loss cannot exceed 50% of the income reported in the fifth carry back year. Changes were also made to the Alternative Minimum Tax laws on these carry- back provisions to prevent the AMT from taking away what the regular tax laws now permit.
- The Act increases the amount of penalties for S corporations and partnerships which file late to $195 per partner/owner per month, up to a maximum of 12 months. This is an increase from $89 per owner per month. This provision is expected to raise over $1.1 Billion to the tax revenues.
- The first-time homebuyer provisions have been extended to May 1, 2010 (from November 30, 2009). A “first-time homebuyer” is one who had no ownership interest in a primary residence for at least three years prior to the closing on the new purchase. This is available to taxpayers with an adjusted gross income under $145,000 (single) and $245,000 (married filing joint). In addition, the taxpayer must be at least 18 years old, cannot be claimed as a dependent of another in the year of the purchase, cannot acquire the property from a related person, and must attach a copy of the closing settlement statements to the tax return in which the credit is being claimed. Finally, there are expanded rules for members of the military concerning timing and qualifications. For service members, the May 1, 2010, deadline is extended to April 30, 2011.
- There is a new provision for “long-time residents” and the purchase of a new primary residence. If you have lived in the same principal residence for at least five consecutive years out of the eight years before the new residence purchase, you will qualify. The maximum credit for this provision is $6,500 and there are no income phase-outs on this except that the home must cost less than $800,000 in order to qualify.
- The Federal Unemployment Tax Act (FUTA) rate of 6.2% has been extended for an additional one year. This amount was supposed to revert to 6% but Congress left the 0.2% surcharge in place for one additional year.
Year End Tax Planning Moves For 2009 (Part 1)
It is that time of the year again and here is our annual reminder for some last-minute tax planning tips that may save you money come April 15, 2010:
- Make charitable contributions by December 31, 2009, to obtain the tax deduction for 2009. Remember that you must back up all cash contributions (including those by check and credit cards) with a receipt or bank record showing the name of the charity, the date of the contribution and the amount. For credit card donations, these are valid as long as they are charged to the card before 12/31/09 (i.e. you can pay them in 2010 and get a 2009 deduction).
- Buy an automobile. There are special tax deductions for automobiles if they are bought and placed into service on or before December 31, 2009. For business owners, there is a maximum first-year deduction of $10,960 in 2009 (this will go down to $2,960 in 2010). Individuals may also be able to deduct the sales taxes on the vehicle as well (up to a purchase price of $49,500– there are income phase outs as usual on this tax deduction).
- Offset capital gains and losses. You are permitted to sell stocks that are money losers for you to offset other capital gains you may have for the year. If you have a capital loss carry forward (available if you sold stocks at a loss in previous years but could not use all of the losses due to the $3,000 annual deduction limit), you can sell stocks at a gain and perhaps pay no taxes if you have sufficient losses to use up.
- Utilize residential energy tax credits. If you buy certain energy-saving windows, insulation, doors, etc. and put them into use before December 31, 2009, you may save up to an aggregate of $1,500 in taxes via this energy credit.
- Pay discretionary business expenses by December 31, 2009, to get the tax deductions in 2009. The same applies to delaying the reporting of income for cash-basis taxpayers (by delaying the collection of $ from customers until 2010, you also delay the reporting and payment of taxes until 2010).
- Convert your Regular IRA to a Roth IRA (if you later determine that this was a mistake, you have until October 15, 2010, to recharacterize the conversion and change it back).
- Make charitable contributions by December 31, 2009, to obtain the tax deduction for 2009. Remember that you must back up all cash contributions (including those by check and credit cards) with a receipt or bank record showing the name of the charity, the date of the contribution and the amount. For credit card donations, these are valid as long as they are charged to the card before 12/31/09 (i.e. you can pay them in 2010 and get a 2009 deduction).
- Buy an automobile. There are special tax deductions for automobiles if they are bought and placed into service on or before December 31, 2009. For business owners, there is a maximum first-year deduction of $10,960 in 2009 (this will go down to $2,960 in 2010). Individuals may also be able to deduct the sales taxes on the vehicle as well (up to a purchase price of $49,500– there are income phase outs as usual on this tax deduction).
- Offset capital gains and losses. You are permitted to sell stocks that are money losers for you to offset other capital gains you may have for the year. If you have a capital loss carry forward (available if you sold stocks at a loss in previous years but could not use all of the losses due to the $3,000 annual deduction limit), you can sell stocks at a gain and perhaps pay no taxes if you have sufficient losses to use up.
- Utilize residential energy tax credits. If you buy certain energy-saving windows, insulation, doors, etc. and put them into use before December 31, 2009, you may save up to an aggregate of $1,500 in taxes via this energy credit.
- Pay discretionary business expenses by December 31, 2009, to get the tax deductions in 2009. The same applies to delaying the reporting of income for cash-basis taxpayers (by delaying the collection of $ from customers until 2010, you also delay the reporting and payment of taxes until 2010).
- Convert your Regular IRA to a Roth IRA (if you later determine that this was a mistake, you have until October 15, 2010, to recharacterize the conversion and change it back).
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