Year-end tax planning could be especially productive this year because timely action may allow you to potentially qualify for a host of tax breaks that won't be around next year unless Congress acts to extend them.

These include, for individuals: the option to deduct state and local sales and use taxes instead of state income taxes; the standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles; the above-the-line deduction for qualified higher education expenses; tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 50% bonus first year depreciation for most new machinery, equipment and software and an extraordinarily high $250,000 expensing limitation.

Finally, without Congressional “extender” legislation (which has come at the eleventh hour for several years), alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won't be available to offset the AMT.



High-income-earners have other factors to keep in mind when mapping out year-end plans. Many observers expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less appealing. Long-term capital gains rates could go up as well, so it may pay for some to take large profits this year instead of a few years down the road. On the other hand, the solid good news high-income-earners have to look forward to next year is that there no longer will be an income based reduction of most itemized deductions, nor will there be a phase out of personal exemptions. Additionally, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer's income.



We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. If you would like to meet with us to discuss your tax situation before year-end, please call and we can schedule an appointment for early December. In the meantime, please review the following list of potential tax-saving moves to consider:



Itemized Deductions

If you are planning to purchase a car, consider doing so before year-end in order to nail down a deduction for state sales tax and excise tax on the purchase price up to $49,500. The deduction expires on December 31, 2009 and has generous phase-outs.



If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings. Unless Congress acts, this will be the last year for taxpayers over age 70 ½ to make a charitable contribution directly from an individual retirement account. Without this provision, the donation would have to be withdrawn from the IRA, claimed as income and then deducted as a donation. That will raise your income and can trigger deduction limits or increase Medicare premiums in the future.



Business Tax Tips

If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year. If you are a partner in a partnership or an S corporation owner this is a very important tax consideration, so please do not hesitate to call us with questions.



Businesses should consider making expenditures that qualify for the business property expensing option, which is up to $250,000 for assets bought and placed in service this year; the maximum expensing amount will drop to $134,000 for assets bought and placed in service next year (higher expensing amounts apply in certain specialized situations). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus write-off generally won't be available next year.



Health Flexible Spending Account

Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer's health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. They would not be deductible if you don't itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor beneath medical expense deductions. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.



If you have set aside funds in your employer's health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don't forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.



To avoid the use it or lose it rule, you must incur qualifying expenditures by the last day of the plan year (December 31, 2009 in the case of a calendar year plan) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan). An exception to the use it or lose-it rule allows FSAs to make distributions of all or part of unused health FSA benefits to military reservists who are called to active duty for a period exceeding 179 days (or an indefinite period).



Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don't forget to reflect any changed circumstances in making your calculation.



Health Savings Accounts

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.



Adjustments to Federal and State Withholding

If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person.



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. If you potentially are subject to the alternative minimum tax, please give us a call to discuss.



Investment, Retirement Savings & Gifts

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.



You have until December 31st to max out your 401(k) contribution limit. The 2009 limit is $16,500 ($22,000 if you are 50 years or older). If you have just started a job and have not previously contributed to a 401(k) or related plan in 2009, you can still contribute an entire years worth of contributions by December 31st.



If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009.



If you are self-employed and haven't done so yet, consider setting up a self-employed retirement plan. A self employed individual has until the extended due date of their return to establish and fund a SEP IRA.



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.



Other Considerations

President Obama recently signed legislation extending and enhancing the first time homebuyers credit. We have assisted many clients with claiming this credit on an amended 2008 tax return. If you would like to discuss the first time homebuyers credit, feel free to give us a call to set up a meeting.



Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income. These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.



If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and qualify for a tax credit. Additionally, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.



We have started to include regular tax tips/articles on our updated website located at advancedtaxsolutions.biz. If you find an article interesting and would like to discuss the topic, feel free to give us a call.



We will be sending out your 2009 tax organizers shortly. We are already scheduling appointments for 2009 tax preparation, so please give us a call at your earliest convenience to schedule your meeting with Dale, Glenn, or Frank. Todd is continuing to focus on tax resolution services. To ensure that your personal returns are completed before the April 15, 2010 deadline, please make sure your appointment is scheduled before March 26, 2010. If you have a corporation or partnership, please schedule your appointment prior to February 26, 2010.



We look forward to seeing you again soon and wish you a Happy Holiday Season.



Very truly yours,

The Staff at Advanced Tax Solutions

11/22/09

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