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.

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