November Newsletter 2009
Posted: 12/2/09
Dear Client,
Year-end tax and financial planning has always been important but never more so than in today’s tough economic climate. Now is the time to review your tax position to consider what moves would be most advantageous before filing your 2009 return.
Assuming no change to the income tax rates for 2010, it remains prudent to utilize similar strategies as we have recommended in prior years. These include postponing income until 2010 and accelerating deductions into 2009. Not only will you defer income to a later year, you may become eligible for certain tax breaks that would otherwise be phased out if your income is too high in 2009.
- It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010.
- Consider using a credit card to prepay expenses that can generate deductions for this year.
- You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
- Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
- Reduce taxable income by increasing contributions to 401(k) plans, SIMPLE pension plans, etc.
- Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
- If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2009.
- You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.
- If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.
- If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009.
- Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.
However, tax rates could increase next year if Congress looks for more revenue to cover deficit spending to help fund stimulus packages. If you believe tax rates will increase in 2010, you should consider accelerating income into 2009 and deferring expenses until 2010.
We have been watching the debate on health care reform for some time. The House recently passed a bill which would provide coverage for many Americans not presently on a plan. What are the costs? They include but are not limited to the following:
- 5.4% surtax on adjusted gross income over $500,000 ($1 million for joint filers)
- Tax on individuals who don’t have acceptable health care coverage
- Change preventing nontaxable reimbursements from health flexible spending accounts, health reimbursement arrangements, and health savings accounts for a medicine or drug unless it is prescribed or for insulin
- $2,500 cap on health flexible spending arrangements in cafeteria plans
- Boosting the penalty for nonqualified distributions from health savings accounts to 20%
- Tax on certain medical devices
- Information reporting for payments to corporations
The Senate has given tough opposition to this bill and is working on its own version. We’ll watch for updates as they become available.
A tax act that was signed into law by President Obama on November 6, 2009 was the Worker, Homeownership, and Business Assistance Act of 2009. Highlights of this act include:
Tax Changes for Businesses
- Net operating losses can be elected to be carried back for up to five years for losses arising in tax years ending after December 31, 2007
- The additional .2% FUTA surtax is extended through June 2011
- Increase in penalty for failure to file a partnership or S Corporation return to $195 per partner or shareholder (increased from $89 per partner or shareholder)
Tax Change for Individuals
- Extended the first time homebuyer credit to purchases prior to July 1, 2010. The Act also increased the phase out for individuals to those with adjusted gross income of $125,000 ($225,000 for joint filers) in the year of purchase and made the credit available for existing homebuyers who are long term residents. Long term residents are defined as any individual (and spouse, if married) who has maintained the same principal residence for any five consecutive year period during the eight year period ending on the date of the purchase of a subsequent principal residence. The maximum credit for those taxpayers is $6,500. A home whose purchase price exceeds $800,000 does not qualify for the credit.
There are some planning opportunities within the American Recovery and Reinvestment Act of 2009 that you should be aware of. Some of these include:
- Extension of bonus depreciation for business assets purchased and placed in service in 2009. 50% of the cost of new assets purchased and placed in service in 2009 for business use will continue to be eligible to be written off immediately with the remaining 50% depreciated over the normal depreciation conventions.
- Extension of enhanced small business expensing (Section 179). This Act extends the amount that small businesses can write off for capital expenditures to $250,000 and retained the phase-out threshold of $800,000.
- Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees in one of nine targeted groups. The new law expands this credit to include unemployed veterans and disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Disconnected youths are defined as ages 16-25 and regularly employed or attending school in the past six months.
- Qualified small business stock gain exclusion is increased from 50% to 75% from the sale of certain small business stock held more than five years and issued after enactment date and before 2011.
- The act temporarily shortens the holding period of assets subject to the S Corporation built-in gains tax holding period from ten years to seven years.
- A new credit called “Making Work Pay” provides a tax credit of up to $400 ($800 for joint returns) for 2009 and 2010. The credit is phased out for adjusted gross income exceeding $75,000 ($150,000 for joint returns).
- There was a one-time cash payment of $250 to retirees, disabled individuals and Social Security beneficiaries.
- Suspension of federal income tax on the first $2,400 of unemployment benefits received in 2009.
- Expanded earned income credit to families with three or more children for 2009 and 2010
- Higher education tax credits have been expanded to $2,500 for the first four years of college. Phase outs are $80,000 ($160,000 for joint returns). This credit temporarily replaces the Hope scholarship credit.
- Computers and computer technology qualify as education expenses in 529 education plans for 2009 and 2010.
- A deduction for sales tax paid on the purchase of a new car. This deduction is allowable to both itemizers and non-itemizers. Some restrictions do apply.
We encourage you to take the time now to plan how to best lower your overall tax bill. You may use the enclosed worksheet to determine the net profit from your farm, trade or business. We would be happy to discuss any of the ideas listed here or help customize a tax plan that works best for you. The holiday season is a busy time for everyone however a few hours planning could save thousands of tax dollars when you file your return. Please call for an appointment prior to year end and we will help you with the tax plan that fits your needs.
Please contact us and we will be happy to meet with you.