This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Year End Tax Saving Ideas For Individuals
There are a number of steps you might take by year-end to cut your 2009 tax bill, such as deferring income, accelerating deductions and capital gain planning.
Caution: If you expect to be subject to the alternative minimum tax (AMT), you may want to accelerate income and delay deductions. The AMT is expected to impact many more taxpayers in 2009 due to the decrease in the exemption amounts. Please contact us for more information.
If you are planning on selling an investment on which you have a gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).
If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. Deferral of tax generally won't work where the bonus is contractually due in 2009.
If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
If you're self employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients or customers until the end of December.
Caution: Keep an eye on the estimated tax requirements.
Pay a state estimated tax installment in December instead of at the January due date. However, the payment should be based on a reasonable estimate of your state tax.
Pay your entire property tax bill, including installments due in year 2010, by year-end (not applicable to mortgage escrow accounts).
Try to bunch "threshold" expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Caution: In most cases, credit cards charges are considered paid in the year of the charge regardless of when you pay on the card. This, however, does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, the deduction cannot be claimed until the bill is paid.
In the case of tax benefits that are phased out if you have more than a certain level of adjusted gross income (AGI), a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2009. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Tip: Deferring income into 2010 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, generally because of much-reduced income or much-increased deductible expenses.
Tip: It may pay to accelerate income into 2009 if your marginal tax rate is much lower this year than it will be next year.
Tip: If you have a sum of income coming in that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method. Call us for additional support regarding estimated taxes.
Caution: Alternative Minimum Tax no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2009.
Due to recent tax policy, the AMT will impact many more taxpayers than ever before due to the reduction in the exemption amounts. The problem is that the tax is not indexed to inflation, and, as a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax.
Items that may affect the AMT include the deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call us for more information.
Note: AMT Exemption Amounts For 2009
$46,700 for single and head of household fliers;
$70,950 for married people filing jointly and for qualifying widows or widowers, and
$35,475 for married people filing separately.
Tax Credit to Aid First Time Homebuyers
First-time homebuyers should know that this tax credit was amended in 2009 to provide further support for the purchase of a new home.
The tax credit was increased:
To a maximum credit of $8,000, from $7,500.
To apply to home purchases before December 1, 2009.
Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar. Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.
The 2009 legislation eliminated the repayment requirements for homes purchased on or after January 1, 2009. Homeowners, however, who sell the house within three years of purchase must repay credit back in full.
Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2009 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.
See article below, Tax Credit to Aid First Time Homebuyers, for further information.
Make Charitable Contributions
You can donate property as well as money to a charity. A deduction is usually available for the fair market value of the property. However, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses.
Note: A written record of charitable contribution is required in 2009. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift made on or after January 1, 2007, unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit in that you avoid paying capital gains on any profit.
Investment Gains And Losses
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses up to $3,000.
Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.
Tip: After selling securities investment to generate a capital loss, you can repurchase it after 30 days. (If you buy it back within 30 days, the loss will be disallowed.) Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.
Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).
Note: The maximum long term capital gains tax rate is currently 15%. This is set to rise to 20% in 2011. This potential change in rate in something to think about in your long term investment planning.
Mutual Fund Investors
Before investing in a mutual fund, determine whether there will be a dividend at the end of the year or a dividend that will occur early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Example: You invest $20,000 in a mutual fund at the end of 2009. You opt for automatic reinvestment of dividends. In late December of 2009, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund's long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund's distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as "ordinary dividends" that don't qualify for relief.
Tip: Wait until after the dividend to buy the shares. (The share net asset value will drop after the dividend is paid.) Alternatively, buy the shares in 2009, but opt to take the dividend in cash instead of having it reinvested.
In spite of these tax consequences, it may be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.
Tip: To find out a fund's ex-dividend date, call the fund directly.
Year-End Giving To Reduce Your Potential Estate Tax
For many, sound estate planning begins with lifetime gifts to family members, gifts which reduce the donor's assets subject to future estate tax. Such gifts are often made at year-end, in the holiday season, in ways that qualify for exemption from federal gift tax.
Your gifts to any donee are excludable (exempt) from gift tax up to $13,000 a year per donee.
Caution: An unused annual exemption doesn't carry over to later years. To make use of the exemption for 2009, you must make your gift by December 31.
Husband-wife joint gifts to any third person are exempt from gift tax up to $26,000 ($13,000 each). Though what's given may come from either you or your spouse or from both of you, both of you must consent to such "split gifts".
Gifts of "future interests" assets which the donee can only enjoy at some future time (certain gifts in trust, for example) generally don't qualify for exemption. But gifts for the benefit of a minor child can be made to qualify.
Tip: Consider adopting a plan of lifetime giving to reduce future estate tax.
Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift's true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.
Gift tax returns for 2009 are due the same date, April 15, 2010, as your income tax return. Returns are required for gifts over $13,000 (including husband-wife split gifts totaling more than $13,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $13,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not "adequately disclosed".
Tip: Call us if you're considering making a gift of property whose value isn't unquestionably less than $13,000.
Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced 5% dividend rate.
Caution: In 2009, investment income of a child under age 19 (or full-time students through age 23) is taxed at the parent's top rate, where in excess of $1,800.
Other Year-End Moves
Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don't already have one. (It need not be actually funded until you pay your taxes, but allowable contributions will be deductible on this year's return.)
If you are an employee and your employer has a 401(k), contribute the maximum amount ($16,500 for 2009 and 2010, plus an additional $5,000 if age 50 or over, assuming the plan allows this much and income restrictions don't apply).
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 7.5% of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2009, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,150 (single coverage) or $2,300 (family). For 2010, the minimum deductible for an HDHP increases to $1,200 for self-only coverage and $2,400 for family coverage.
These are just a few of the steps you might take. Please contact us for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.
Here are some suggested tax moves to be taken no later than Dec. 31, 2009 for businesses on the calendar year that may save businesses income tax:
Purchase New Business Equipment
Expensing: The Section 179 Deduction for equipment purchases remains for 2009, businesses can elect to expense (deduct immediately) the cost of most new equipment up to $250,000 (subject to a dollar-for-dollar reduction in that $250,000 for such purchases over $800,000).
Note: Many states have not matched these amounts and therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Timing: If you intend to purchase business equipment this year, the proper timing of purchases might, in some cases, actually increase the tax benefit you gain from depreciation of that equipment. Here's a simplified explanation:
Conventions: The tax rules for depreciation include "conventions" (rules) for determining how many months' worth of depreciation you can claim in the year you first place property in service. The conventions that come into play with equipment are...
The half-year convention: When the half-year convention applies, all property that you begin using during the year is treated as placed in service at the midpoint of the year. This means that no matter when you begin using the property, you treat it as if you began its use in the middle of the year.
The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40% of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule is out the window, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
Tip: Don't neglect to bring any planned equipment purchases to our attention. A careful examination of the timing of planned equipment purchases will allow you to take full advantage of these tax rules.
Other Year-End Moves
Income Delay or Acceleration. Depending on whether it's better for you, tax-wise, to delay or accelerate income, you can decide to bill clients or customers sooner (before year-end) or later (after the year-end) to accomplish your tax planning goals.
Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2009 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Caution:Remember that by increasing basis you're putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Retirement Plans. Self-employeds who have not yet done so should set up self-employed retirement plans before the end of their individual tax year 2009.
Dividend Planning. Dividends you cause your corporation to pay qualify for the reduced 15% (or 5%) rate in the hands of stockholders, including you as a stockholder. Such a dividend may reduce the risk of a tax on accumulated corporate earnings or an IRS claim that compensation to company executives was excessive and so partly nondeductible.
Budgets. Although the need for a business budget may seem obvious, many companies overlook this critical business planning tool. Therefore, a brief reminder may be in order at year-end. A budget is extremely effective in making sure a business has adequate cash flow and, thus, in ensuring a business's financial success.
That's why every business, from the smallest to the largest, should have a budget. Once the budget has been made up, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Each year-end, business owners should get together with their accountants and budget (project) revenues and expenses for the coming year. Amounts can be broken down to cover monthly or even weekly periods, depending on the business's needs.
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2009. As stated above in regard to individual tax planning, do not act on these suggestions without consulting us first. They are general in nature, and your specific tax or financial situation may require special planning.
When it comes to budgeting "a vital part of any business's growth and cash flow" - it's important to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them. These errors tend to throw budget estimates out of line with reality, thereby taking away from a budget's usefulness.
Not Setting Goals. It's almost impossible to set spending priorities without clear goals for the coming year. It's important to know, in detail, what you want or need to achieve in your business.
Cost Underestimation. Every business has ancillary or incidental costs that often don't get budgeted. For example, each time you buy a new piece of equipment or software, you must budget for staff training and for maintenance of the equipment, as well as the actual cost of the equipment.
Lack of Flexibility. Don't be afraid to update your forecasted expenditures either several times per year or whenever new circumstances affect your business. Compare estimates to what you actually pay out, and then adjust your budget figures.
Tip: Consider reviewing your budget with us to help ensure accuracy and completeness. Your business growth and cash flow could benefit greatly.
Retirement Contributions Limits Unchanged for 2010
Despite some concerns that the retirement contribution limits would be reduced in 2010, the IRS announced that the maximum contribution limits for your 401(k) and other retirement plans will remain unchanged in 2010. The limits will remain at the 2009 levels.
These limits are set each year based on a cost of living adjustment. The maximum contribution is based on a formula using the third quarter CPI-U (Consumer Price Index for all urban consumers). This index declined 1.3 percent over the last year leading to the fear of a decline in the contribution limits.
The IRS noted, however, under the Social Security Act, the limits could not be reduced.
All retirement contribution limits for 2010 will remain unchanged from 2009 levels. For example:
Savings Incentive Match Plan for Employees (SIMPLE): Contribution limit $11,500 with a $2,500 catch up clause for age 50 and older.
Individuals Limits for 401(k): Annual compensation limit $245,000; maximum annual contribution $16,500 with a $5,000 contributions for age 50 and older.
Individual Retirement Plans (IRAs): Maximum contribution $5,000 with a $1,000 catch up for age 50 and older.
Other 2010 Changes
Further, several other deductions will remain unchanged in 2010. Personal exemption will remain at $3,650. Standard deduction will remain the same for married couples filing jointly at $11,400 and married filing separately $5,700. The standard deduction for head of household is $8,400 for 2010, up from $8,350 in 2009. Annual gift exclusion remains at $13,000.
With 2010 models arriving in dealer showrooms, you should know that purchasing a new car, light truck, motor home or motorcycle could qualify you for a special deduction for the state and local sales and excise taxes on your 2009 tax returns. Purchases made before January 1, 2010, will qualify for this deduction under the American Recovery & Reinvestment Act of 2009 (ARRA).
The deduction is limited to the sales and excise taxes and similar fees paid on up to $49,500 of the purchase price of a new vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.
Taxpayers who make qualifying new vehicle purchases this year can estimate the deduction with the help of Worksheet 10 in IRS Publication 919, How Do I Adjust My Withholding? Lines 10a to 10k of the worksheet show how to take into account purchases above the $49,500 limit, as well as the reduced deductions for taxpayers at higher income levels.
The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
Many United States citizens earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.
U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).
Foreign source income includes earned and unearned income, such as:
Wages and tips
An important point to remember is that citizens living outside the U.S. may be able to exclude up to $91,400 of their 2009 foreign source income if they meet certain requirements. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $182,800 for the 2009 tax year. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.
Call us for more information, or check out IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Taxes on Early Distributions from Retirement Plans
Payments that you receive from your IRA or qualified retirement plan before you reach age 59 1/2 are normally called "early" or "premature" distributions. These funds are subject to an additional 10 percent tax and must be reported to the IRS.
There are a number of exceptions to the age 59 1/2 rule if you make an early withdrawal. Some exceptions apply only to IRAs, some only to qualified retirement plans, and some to both.
In addition to the 10 percent tax on early distributions, you generally must include the distribution in your income. If you received a distribution from an IRA, other than a Roth IRA, to which you made any nondeductible contributions, the portion of the distribution attributable to those contributions is not taxed. If you received a qualified distribution from a Roth IRA, none of the distribution is taxed. If you received a distribution from any other qualified retirement plan, the portion of the distribution attributable to your cost, not including pre-tax contributions, is not taxed.
A "rollover" is a way to avoid paying tax on early distributions. Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to another eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.
For more information, call us or see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.
While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.
Here are a few tax facts about capital gains and losses:
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2009, the maximum capital gains rates are 5, 15, 25 or 28 percent.
As noted earlier, the long term capital gains rate is expected to increase to 20% in 2011.
If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
Call us for more information about reporting capital gains and losses, or get IRS Publication 550, Investment Income and Expenses.
The Internal Revenue Service has a new form to aid the processing of mortgage applications under the Home Affordable Modification Program (HAMP) as part of the Making Home Affordable Program. The new form will make it simpler for people, especially homeowners trying to modify or refinance their mortgages, to order copies of their tax return transcripts.
Taxpayers often need copies of their tax return information, especially when they are obtaining a new mortgage or when they are refinancing or modifying an existing mortgage. Taxpayers can use Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, to order a Form 1040 series tax return transcript free of charge.
A transcript is a computer print-out that includes most lines on the original return. A transcript often is an acceptable substitute for a copy of the original tax return for purposes of verifying income.
Form 4506T-EZ is a streamlined version of the Form 4506T, Request for Transcript of Tax Return. The Form 4506T-EZ is only for individuals who filed a Form 1040 series. Businesses, partnerships and individuals who need transcript information from other forms must still use the Form 4506T.
Transcripts ordered through the Form 4506T-EZ can be mailed to a third party, such as a financial institution. The IRS cautions taxpayers that they should complete all required fields, especially the requested years, before signing and dating the form. Taxpayers can obtain Form 4506T-EZ at IRS.gov. It is a fillable form so people can complete the form online and print a copy. They can mail it or fax it to the addresses and numbers listed in the instructions. It generally takes 10 days to process the request.
The IRS also recommends that people retain copies of their original tax returns in a safe, secure place. Exact copies of tax returns are available by filing Form 4506, Request for Copy of Tax Return, but each copy costs $57 and can take 60 days to process.
Employers - Income Tax Withholding. Ask employees whose withholding allowances will be different in 2010 to fill out a new Form W-4.
Employers - Earned Income Credit. Ask each eligible employee who wants to receive advance payments of earned income credit during the year 2010 to fill out a Form W-5. A new Form W-5 must be filled out each year before payments are made.
Employers - Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2009. This due date applies only if you deposited the tax for the quarter in full and on time.
Employees who work for tips - If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.
Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in October.