2009 YEAR-END TAX TIPS
What an Unusual Year 2009 Has Been!
We’ve seen a number of new tax provisions passed in 2009 that were designed to help us recover from the very nasty recession we’ve been experiencing. Some of us had to change jobs or are still looking for employment and others had to take pay cuts. For the first time in our memory, there will be little or no inflation-related tax adjustments because of the low rate of inflation. Proposed health care legislation is likely to mean higher taxes for many of us and Congress is talking about other tax increases needed to reduce our record deficit. In other words, we all face a very complicated and very difficult year-end tax planning season this fall.
Here are a few reasons why that is so:
- More than thirty tax provisions are scheduled to expire at the end of 2009. Where possible, it may be time to "make hay while the sun shines." On the other hand, some of these provisions may (and likely will) be extended by Congress. (We’ll be keeping a close eye on developments in Washington, but you’ll need to check with us so that we can keep you posted.)
- Year-end tax techniques usually involve postponing income and accelerating deductible expenses to reduce taxes for the current year. But, because of the economic downturn, some of us may have significantly less income in 2009 than we expect to have in 2010. Doing things in reverse -- deferring expenses and accelerating income -- may save more in taxes if you will be in a higher tax bracket in 2010 than in 2009. But, of course, you will have to factor in the time value of money to see if this reverse strategy is worthwhile.
- A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions during 2009. This means that taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed.
- There are other new changes that take effect in 2010. For example, the income restriction is removed for clients who want to roll funds in a traditional IRA over to a Roth IRA. In addition, the phase-out of personal exemptions and the phase-down of itemized deductions for high-income clients are both eliminated in 2010.
- Finally, without Congressional “extender” legislation (which has come at the eleventh hour for several years), alternative minimum tax (AMT) exemptions for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won't be available to offset the AMT.
What's New for 2009?
Expanded Education Credits. The American Opportunity Tax Credit expands college education tax breaks under the Hope credit. For 2009, the credit increases to as much as $2,500 of the cost of tuition and related expenses paid during the tax year, including expenditures for course materials. Individuals can receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year plus 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is now available during the first four years of post-secondary education in a degree or certificate program (rather than just the first two years as in the past). Forty percent of the tax credit is refundable and a taxpayer who meets certain requirements can now receive a refund of up to $1,000 even if no taxes are owed. Because these credits are subject to a variety of limitations and to a phase-out, be sure to check with us if you think you will qualify for this credit.
Qualified Tuition Programs. (Also known as Section 529 Plans) QTPs are tax-advantaged savings plans that can be used to pay qualified education expenses. This year the definition of qualified higher education expenses for tax-free distributions from a qualified tuition program has been expanded. It now includes amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment and fiber optic cable related to computer use. Also included is Internet access (including related services). Any of these expenditures will qualify so long as they are to be used by the beneficiary and the beneficiary's family during any year that the beneficiary is enrolled at an eligible educational institution.
Direct Deposit Options for Tax Refunds. Once again, in 2010 you will be able to split your 2009 tax refund and deposit it into as many as three different bank accounts. Should you wish, you can direct the IRS to deposit your refund into an IRA and take the deduction on your 2009 tax return. Not only that, but this year you can choose to receive up to $5,000 of U.S. Series I Savings Bonds as part of your income tax refund without setting up a TreasuryDirect® account in advance.
Alternative Minimum Tax (AMT). The 2009 AMT exemption amount increases to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 if married filing separately). The AMT exemption amount for a child whose unearned income is taxed at the parent's tax rate has increased to $6,700.
Nonbusiness Energy Property Credit. In 2009 and 2010, a taxpayer can claim a credit under Code Sec. 25C equal to 30% of the sum of the cost of: qualified energy efficiency improvements to his home (e.g., energy-efficient windows, doors, insulation materials, and certain roofs) and residential energy property expenditures (e.g., high-efficiency heat pumps, air conditioners, water heaters, and stoves that burn biomass fuel), up to an aggregate amount of $1,500.
2009 Mileage Rates. Instead of deducting actual costs per mile, you can deduct your 2009 business miles at the standard rate of 55¢ per mile (down 3.5¢ from the end of 2008 rate). Use 24¢ for each mile driven to get medical care or in connection with a move that qualifies for the moving expense deduction. You can deduct 14¢ per mile when using your car for charitable purposes. That rate is set by Congress and is the same as last year.
Unemployment Compensation. For any tax year beginning in 2009, each recipient of unemployment compensation can exclude from gross income under up to $2,400 of the amount of unemployment compensation received during the year.
New Rules for Children of Divorced or Separated Parents. If you are a noncustodial parent claiming an exemption for a child, you can no longer attach certain pages from your divorce decree or separation agreement instead of Form 8332 (Release/ Revocation of Release of Claim to Exemption for Child by Custodial Parent). Also, new rules allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332 or similar form. Such a revocation is effective no earlier than the tax year beginning in the calendar year following the calendar year in which the custodial parent provides, or makes reasonable efforts to provide, the noncustodial parent with written notice of the revocation.
First-time Homebuyer Credit. For residences purchased after 2008, the maximum amount of the 10%-of-purchase-cost first-time homebuyer credit under Code Sec. 36 is increased to $8,000 (up from $7,500) and, although Congress is considering an extension, current law requires that the purchase close by Nov. 30, 2009.
There are a number of limitations, phase-outs and rules we would be pleased to help you sort out. (For instance, your home must be located in the U.S. and must be your principal residence . . . your main home.) You (and your spouse if married) must not have owned another principal residence in the U.S. in the three-year period before purchasing your new home. (Thus, the home doesn't literally have to be your first home.)
Recapture of the credit is generally waived for qualifying home purchases. However, if a taxpayer disposes of the home or it otherwise ceases to be his or her principal residence within 36 months from the date of purchase, credit recapture applies. The law also allows the refundable credit to be claimed on either your 2009 tax return or on an amended 2008 tax return.
Tax-free Home Sale Rules Are Changed. The ability to avoid tax on a gain from the sale of a home has changed. Any Gain from the post-2008 sale or exchange of a principal residence that is attributable to periods of “nonqualified use” is not eligible for the homesale exclusion. “Nonqualified use” is any period after 2008 during which the property is not used as the principal residence of the taxpayer, or his spouse or former spouse.
Did you have a significant income change; change your name or address; marry, divorce or live apart from your spouse; have or adopt a child; lose a spouse or a child; start or sell a business; purchase or sell business equipment or rental property; create a living trust; or receive any correspondence from the IRS?
Call today for a tax planning appointment. The sooner we meet, the more time we will have for tax-saving action.
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