TAX NEWS & TIPS

Congress has a full plate.  Third year of global recession.  The war on terror goes on.  Energy and pollution are bigger concerns than ever.

There is one more short session for Congress late this year, but any really important changes will wait for the new Congress convening in January.

You and I face the world of your income tax.  Several familiar laws have expired.  But, they might still be extended.  More are set to expire at the end of this year.  I’ll discuss some important ones now, but I must warn you --- both of us must be prepared for last-minute changes in tax laws.

If Congress Does Nothing At All ---

Several “temporary” laws were enacted over the past 10 years or so.  2010 is the last year for many of them.  Congress does this to allow future legislatures to “fine-tune” new ideas after some experience with them.  This seems wise.  Problem – important new issues pop up.  (Did I forget to mention natural disasters and big oil spills?)  Congress has had a lot to deal with.  However, in just a few months we face massive changes in tax laws.  Suppose Congress can’t find the time to deal with these. 

Two Examples.  Let’s look at a couple of ordinary families.  We’ll look at their 2010 income tax bills under current laws.  Then I’ll show you their 2011 tax bill assuming our laws simply follow what is “on the books” at this time. 

1.  Retired Couple.  Frank and Mary are both 67, and retired.  Their income consists of interest and dividends, a pension, and social security for each of them.  They use the standard deduction.  Here are the numbers:

            Interest Income:         $1,000

            Dividend Income:      $2,000

            ($1,500 “qualified” dividend, plus $500 capital gain distribution)

            Pension:                     $30,000

            Social Security:         $25,000

 Now let’s compare their income tax bills for 2010 and 2011:

                                                2010                           2011

Income tax:                             $1,771                        $3,166

 Wow!  How can the 2011 tax be so high?  Easy.  The 10% tax bracket is set to expire.  Relief from “Marriage Penalty” expires, cutting the standard deduction.  The capital gain:  We use a split rate – 0% for incomes below the 25% tax bracket, 15% above this.  No tax at all for our couple!  In 2011 the rate goes to 10%.  The qualified dividend is even worse.  In 2010 the tax is figured as if this were a capital gain – no tax!  In 2011 the dividends will be “ordinary” income. They’ll be taxed at 15%.

 2.  Working Couple.  John and Marsha both work, and have two children in grade school.  Their income is from wages, and they also use the standard deduction.  Their income:

            Wages:                                 $70,000

What do they pay?                               2010                           2011

Starting tax:                            $5,439                        $6,555

            Less: Child Credit                    $2,000                        $1,000

            Less:  Tax Credit for Workers

                                                            $800                           $0

            Total Paid to Government:          $2,639                        $5,555

 Ouch!  Again, no 10% tax bracket and reduced standard deduction make a big change.  For children under age 17 the child credit is set to drop from $1,000 to $500.  The special “Making Work Pay” tax credit of $800 expires after 2010. 

What Can We Expect?  I wish I could tell you!  The entire point of these examples is to let you know just how unsettled tax laws are for both 2010 and 2011.   

One of my biggest fears lies in trying to help you plan for the impact of coming changes.  Some 2010 rules may still change before Tax Time.  In fact, we might see a year like 2006, when IRS had already released forms before some last-minute changes in December.  There were a couple of valuable deductions allowed by law, but IRS forms had no lines to claim them!

 Worse – I may not know the 2011 rules until after I’ve prepared your 2010 return – and helped make plans for 2011.  What do we do then?

Will we see new and unexpected rules?  Some expiring tax breaks will be extended, but which ones?  You could be left with a serious shortfall in your withholding or estimated tax payments.  Tax planning is a risky proposition. 

Owning vs. Renting – Time to Switch? 

Most folks set a goal of owning their own home.  A smaller number prefer the simplicity and freedom of renting.  When you consider making a switch from one to the other, cost is a major factor.  That’s where I come in – income tax distorts the numbers. 

Tax Deductions.  It’s very simple.  Homeowners can deduct mortgage interest and property tax they pay.  There’s a limited ability to deduct mortgage insurance premiums, but this is supposed to expire after 2010.  (Mortgage insurance, not homeowner insurance.)  Normally, you may not deduct utility bills, maintenance, repairs, furniture, or improvements.  Just interest and taxes. 

Claiming Deductions.  Anyone can use the “standard deduction”.  At present it’s $5,700 for single filers, twice as much for a couple.  Suppose you’re a single renter, and typically have $4,000 worth of deductions from state taxes, charity, and some job expenses.  If you buy a home, the first $1,700 of new deductions from interest and taxes on the property won’t save you a penny. Only the excess helps.

 Tax Brackets change the real cost of your deductions. The higher your income, the higher the tax on your uppermost dollars.  New deductions remove some of these dollars.  Spend $1,000 on a deductible item and your taxes go down.  A wealthy taxpayer might see brackets of 35% for federal tax, plus another 10% to the state.  The $1,000 deduction reduces his tax by $450, leaving a net cost of $550.  One with modest income might see only a $150 federal savings, and no state savings at all.

 Example.  Imagine a renter paying $1,500 monthly rent is shopping for a home.  He might see a home needing a $220,000 mortgage, plus payments for taxes and hazard insurance.  The total obligation is $2,000 monthly.  His first impression is “Wow, I could never afford the extra $500 a month!”

            Nearly Equal!  After we take account of the tax savings, the real cost might be nearly identical to the current $1,500 in rent.  The $2,000 monthly payment includes $900 or $1,000 in interest, plus another few hundred for taxes.  Depending upon income and tax bracket, the “after-taxes” value of the $2,000 is likely between $1,400 and $1,700.  The new $2,000 might have the same “feel” as the familiar $1,500 rent.

Switch to Rent – Reverse This!  Today we see folks forced out of their homes for a variety of reasons.  If you abandon a property with the same $2,000 monthly cost, you might find a rental at $1,500.  Whoops!  Your tax deductions are now gone.  Your income tax bill is going up!  It might increase by $500 monthly.  If so, it will still “feel” the same as before.  You  have the same sad problem.

 Your Case – Call Me!  Each taxpayer (and property) is unique.  If you face a change, I can help. Whether you’re buying a home, or moving out in favor of renting, the numbers are deceptive.  You are used to one position.  To evaluate the other involves taxes. I can help you get a “feel” for the real numbers.  Please call me. 

Energy Credits Are Alive And Well

 Two Credits help homeowners – one for saving energy, one for making it.

 Energy-conscious homeowners can “partner” with the government to help cover improvement costs.  Easiest way to understand the programs is to distinguish between conserving energy, and actually generating it.

 Conserving Energy – Main Home Only.  For ’09 and ’10, you can get tax breaks for energy-saving changes in your home.  Insulation, energy-saving windows and doors, and high efficiency heating and cooling devices.  Main home only, not a vacation home or rental.

            Limits.  You can get a 30% rebate on your tax return for the first $5,000 spent in 2009 and 2010 combined.  That’s up to a $1,500 tax reduction.  Once expenses pass $5,000 you’re on your own – no more credits.

            Which Items?  Check with the manufacturer.  There are complicated engineering standards.  IRS says we can rely on manufacture’s statements, so keep a copy of their brochure.  They advertise these savings loudly.

            Which Costs?  A little tricky here.  For some items you may include only the cost of the item or materials, but not installation costs. For others, you can include installation costs.  Roughly speaking, no installation costs are allowed for windows, doors, or insulation – the “handy” homeowner might install these himself.  With items like furnaces or air conditioners you can include installation – these often require permits and inspections.  Play safe, and keep records of all costs separately.

Generating Energy – Any Residence.  Generating energy is good for America’s future.  That’s why the tax incentives exist.  The credits for generating energy are bigger, better, and more extensive.

            Which properties?  Any residence you occupy personally, but not a rental.  You could do this with multiple properties.

            What Kind of Measures?  Solar panels to generate electricity or heat are the most common.  Energy from wind, geothermal, or fuel cells also counts. Only items serving living areas qualify – nothing for pools or spas.  Include all costs involved in the project.  If you get subsidies or rebates from the power company or your state, your credit is based on your net cost.

            How Much?  The credit is a flat 30% of your cost, with no upper limits.  These measures are costly.  If you spend $40,000, you get a guaranteed $12,000 tax break.  If your credit exceeds your tax, you can carry the excess to future years, until you get the full credit.

            When?  The conservation credits cover 2009 and 2010 only.  The credits for generating energy are good through 2016.  Any carryovers are good indefinitely.

 Business Credits.  The information here applies only to residential properties.  There are credits for work done on business properties, but several rules are different. If you need help here, please call me. 

Items to Watch 

Once again I’ll warn you --- ’09, ’10, and ’11 have more law changes than any 3-year period in history, and more changes are likely.  For now, to protect your own tax dollars, make up your mind to keep careful records.  Here are some common areas where we’ve seen recent change.  Be extra alert here to avoid surprises. 

ü      Separate Parents.   The tax break for a youngster normally goes to the parent with greater time of custody.  That parent is free to waive the deduction to the other parent.  IRS collects less tax.  The parents can choose to split the savings.  Please remember – the custodial parent must sign an IRS waiver form, and we must attach this to the other parent’s return.  IRS demands the form, so talk this over between yourselves.

ü      Capital Gains.  For 2010 we still have low rates on long-term gains.  Few experts expect to see these low rates in the future.  This may be the year to align the portfolio.

ü      Over 70 ½ IRS Distributions were voluntary in 2009.  This year you must take at least a minimum distribution based on your age.  Don’t miss this one!

ü      From IRA to Charity.  If you were over 70 ½ in 2009, your IRA custodian could make a charitable gift directly from your IRA, reducing your taxes.  This is expired.  As of late July it has not been extended.

ü      Roth IRA Conversions.  Lots of talk here.  In 2010 and on, anyone can convert IRA funds to a Roth IRA.  You’ll be taxed, but there’s no penalty as long as you don’t touch the money for 5 years.  After 5 years (and after you’re 59 ½ ) the money’s all tax-free.  A very good thing!  Convert as much or as little as you like, as long as you pay the tax.  Many other rules apply, but remember – the transfer must happen by December 31, else it’s an issue for 2011.  Call me if you need help – before December 31!

ü      Collect Unemployment?  You may recall the first $2,400 you got wasn’t taxed in 2009.  For 2010 all unemployment income is taxable.

ü      Foreclosed?  Loan Modified?  The weak economy produced record numbers of “homeowners in trouble”.  If either happened to you, I’ll need all possible information.  History on the loan and payments, full facts on the actual events, everything.  Any loan you did not fully satisfy can produce “income” if the debt was cancelled.  There are ways to avoid the tax, but they are among the most complex of tax laws.  With complete information, the reporting is tricky – without the information, it’s impossible.

ü      College Education.  Special laws can provide up to $2,500 per student in tax reductions. There are lots of rules.  For safety, pay close attention to all tuition and fees, even if loans provide the funds.  Also keep records on all costs for books and class supplies.  In some cases, even graduate classes or job training count.  If you have the information, I’ll see to it you save every possible dollar.

If any costs are paid using a college savings plan, I’ll need records of costs and withdrawals.

ü      Special Credits.  Several things might produce big tax benefits:

Education is mentioned above. 

Energy-Saving items are discussed above as well.

Hybrid Cars.  If you bought a brand new hybrid, there might be a valuable credit.  Toyota and Honda credits ran out in 2009.  Ford had reduced credits for 2010.  Most other makes have credits available.  For full details online, go to www.irs.gov and search “alternative motor vehicle credit”.  There are also some very generous credits for a very few of the new electric plug-in vehicles.

Child & Dependent Care.  These are alive and well.  Besides the costs, be sure to get full ID from the provider, including telephone number and their “Tax ID” number.

Employers have some new tax breaks this year.  I’ll need complete information for new hires, as well as any long-time employees in your small business.  If you provide health insurance, I’ll need full details on the employees, payroll and premiums.

Home Buyers.  Special credits expired during 2010.  If you bought a home, you heard about them.  There are several documents we must attach to your return.  Call me in advance. 

Keep Good Records.  2010 and 2011 will be challenges for you and for me.  Keeping track of all the law changes is one thing.  Being able to find your information is another.  Please set aside a place to keep any information that affects your taxes.  It will be tough to dig this out at tax time unless you make the effort now.  Yes, it’s a chore, but remember – you’ll be paid for the effort! 

Looking for Work?  Track All Expenses! 

We are in the midst of record unemployment.  I sincerely hope your own job is secure.  When its time to look for another job, there might be some very valuable tax help available. 

If You Itemize Deductions you may include job search costs. Probably no help for you if you use the standard deduction, currently $5,700 for single filers, twice as much for couples.  There’s also a “floor” – your work-related deductions must exceed 2% of your gross income. 

Same Occupation Requirement.  Tax law looks at you as a producer within the economy.  As long as your search is within the same general occupation, all costs count.  A teacher can deduct costs to look for work in the field of education, but not to get a job as a welder. 

Types of Costs.  Almost anything related to the search counts.  Agency fees, costs to produce a resume, duplicating employment files, even a couple months’ of your on-line fess if you use your computer in your search.

            Travel vs. Transport.  Within your metropolitan area, any driving is called “transport”.  Deduction – 50 cents for each mile you drive.  Keep a log of interviews, meetings, trips for copying – it really adds up.  “Travel” involves being “away from home overnight or longer”.  Now everything counts – fares, shuttles, hotels, meals – any out-of-town costs.  For meals, there are allowances – probably easier than keeping records.

            Be alert for anything.  Even lunch with a friend can provide a contact.  I hope you find the right job quickly and easily.  In the meantime I’d like to see you save every tax dollar the law allows. 

Tips For You 

Youngster & Summer Jobs.  If your child had that first summer job you may have questions.  Will my youngster be taxed?  Will my own tax be affected?  Some facts, plus a couple of suggestions.           

If the child won’t reach age 19 in 2010 you still have a dependent.  For ages 19-23, it depends on whether they are in school.  The youngster may be taxed, but the tax is likely to be zero.  The first $5,700 earned is tax-free.  We need to file a tax return if there is any withholding, but it is likely there will be a refund. 

That refund.  Why not try some financial training!  A refund sounds appealing, but suggest the youngster open a Roth IRA.  Not a big account, say $200 or so from the refund.  You might start a valuable savings habit!

 Saving For College.  Most parents (or grandparents) start to think about putting money aside for a youngsters’ education.  There are two different directions you might take. 

Personal Accounts.  Savings the money directly is one option.  You’ll need help with issues like custodial accounts, “in trust for” accounts, and the like.  Or, you can consider:

Tax-Favored Accounts.  These offer tax-free growth.  The income is never taxed if spent on education.  There are a couple of options.

            ESA.  Simplest is the Coverdell Education Savings Account (ESA).  The money in these accounts can be tapped as early as kindergarten.  Many local banks and credit unions offer these.  They’re small – no more than $2,000 annually for any child.

            Section 529 Plans.  These are administered for individual states and several universities.  They only work for college and above.  They offer similar tax benefits, but a little less control.  Contribution limits are much higher than for the ESA. 

Both Plans allow income to build up without tax.  When money is withdrawn, even the growth is tax-free if the funds are spent on the proper education costs.  In some cases excess funds can be moved to benefit another child.  There are many other differences.  For a clear and readable explanation, look at the website www.collegesavings.org.  The big news – neither program generates kiddie tax problems. 

Kiddie Tax & College Students.  If your youngster is going to college, be on the lookout for investment income of $1,900 or more for the student.  This makes anyone under age 24 a “Kiddie” for income tax purposes.  Congress set rules years ago to avoid wealthier families from “shifting” income to youngsters with lower tax brackets.  The rules kick in at $1,900 of “investment” income – interest, dividend, royalty, or capital gain items.  They force the youngster to pay taxes at their own tax rates, or the parents’, whichever is higher.  If there is any chance this applies to your child, please warn them not to file their own tax return.  We need to finish your return before theirs can be done correctly. 

Extensions Expire October 15.  A few of you still have not filed for 2009.  Please make an effort to find the missing information.  We have little time left.  In most years I am not quite as busy this time of year.  2010 is very different!  I expect to have more tax-planning work with clients who are confused over new rules.  At the same time, I want to give my full attention to your return.  I want to keep your taxes to the absolute minimum. 

Tax Calendar

 Sept. 15                     3^rd quarter estimated tax payments due.

 Oct. 15                        Extensions to file 2009 Form 1040 expire. 

Nov. 1                         3^rd quarter payroll returns due.  (Nov. 10 if tax paid in full and on time.) 

Dec. 31                      Last chance for deductions in 2010. 

Jan. 17                       4^th quarter estimated tax payments due for 2010.

ROTH IRA CONVERSIONS

If your traditional IRA has dropped in value and you expect to pay higher federal income tax rates in future years, now might be a very good time to consider converting all or part of your traditional IRA balance into a Roth IRA. Here’s why. If you convert, it will trigger a current tax hit on the amount you convert. But, with your traditional IRA balance at a depressed level (and possibly your overall income too), the tax hit will be less. After the conversion, your new Roth IRA balance can build up federal-income-tax-free. Eventually you can take tax-free withdrawals after age 59½ when your marginal tax rate may be higher (perhaps much higher) than it is right now.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA because you’re deemed to receive a taxable payout from your traditional IRA with the money then going into the new Roth account. So, a conversion will generally trigger a current federal income tax bill (and maybe a state income tax bill too). But the following positive factors may outweigh the current tax hit.

·         The conversion tax hit is reduced if the value of your traditional IRA has been beaten down by stock market losses.

·         Today’s tax rates might be the lowest you’ll see for the rest of your life. If so, converting would allow you to completely avoid higher future federal income tax rates on the entire post-conversion increase in the value of your Roth account.

The Roth conversion privilege is not available to everyone this year. For 2009, it’s only available if your modified adjusted gross income (not including any additional income triggered by the conversion itself) will be $100,000 or less.

Good News: For 2010, the $100,000 restriction is scheduled to completely disappear, which will allow all individuals to take advantage of the Roth conversion strategy no matter how high their income. If your income level prevents a 2009 Roth conversion, you can do one in 2010. And 2010 is almost here!  In addition, for conversions done during 2010 only, the taxes owed are paid over two (2) equal installments on your tax return for 2011 and 2012.  You may, however, elect to report the entire amount in 2010, the year of conversion.

You Can Reverse an Ill-advised Roth Conversion

Another great thing about the Roth conversion strategy is you can always change your mind well after the fact. Believe it or not, you have until October 15 of the year following the conversion year to recharacterize (unwind) your converted account. For example, say you convert two traditional IRAs into Roth accounts in early 2010. Later next year, the values of the converted accounts plummet due to poor performance of the investments held in the accounts. In this bleak scenario, you would pay 2010 income tax on value that later disappeared. Bad idea! Thankfully, however, you have until October 15, 2011 to recharacterize the two converted accounts back to traditional IRA status. It’s as if the ill-advised conversions never happened. So, you won’t owe any 2010 income tax on the now-unwound conversions.

Conclusion

Low current tax cost for converting plus the chance to avoid higher future tax rates on income and gains that will accumulate in your Roth account as the economy recovers (we hope) may add up to the perfect storm for the Roth conversion idea. That said; please contact me before pulling the trigger. There are a number of variables to consider, and I would welcome the opportunity to work with you to ensure a well-informed and thoughtful decision.

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2009 return and in future years. The federal income tax environment is very favorable right now, but it is not likely to continue much longer. Now is the time to take advantage of the tax breaks that Congress has provided before they disappear.

Some General Comments before We Get Started...

First of all, the goal of year-end tax planning is to identify strategies that will allow you to pay the lowest overall tax. One means of accomplishing this if you expect your income to stay about the same during the next few years, is to postpone when taxable income must be reported and accelerate the time when expenses can be claimed as deductions. Still another smart move for many people is to convert ordinary income (taxed at rates up to 35%) into long-term capital gains that are subject to a tax rate of no greater than 15%.

Regardless of the approach taken, however, it’s important to limit tax planning to achieving your financial goals in a tax efficient manner. In addition, you should look at your tax situation for at least a two-year period, with the objective of reducing your tax liability for the two years combined rather than just for 2009.

With these general principles in mind, let’s take a look at some specific tax planning ideas that apply to the vast majority of taxpayers—that is, those in a regular tax situation. Call me if you would like to discuss those that may be appropriate for you or if you want to consider other tax-saving strategies.

Ideas for Increasing Deductions

One way to reduce your 2009 tax liability is to look for additional deductions. Here’s a list of suggestions to get you started:

Make Charitable Gifts of Appreciated Stock. If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares

However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy it back as this will trigger the wash sale rules, which means your loss won’t be deductible, but instead will be added to the basis in the new shares.

Maximize the Benefit of the Standard Deduction. For 2009, the standard deduction is $11,400 for married taxpayers filing joint returns. For single taxpayers, the amount is $5,700. Currently, it looks like these amounts will be about the same for 2010. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years.

For instance, you might consider moving charitable donations you normally would make in early 2010 to the end of 2009. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2010. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Bunch Deductions Subject to an Adjusted Gross Income Limit. Miscellaneous itemized deductions (such as unreimbursed employee business expenses) are deductible to the extent they exceed 2% of your adjusted gross income (AGI). (Your AGI is the number at the bottom of the first page of your return.) Medical expenses are deductible only to the extent they exceed 7.5% of AGI. To lessen the affect of these AGI limitations, try to bunch your miscellaneous and medical expense deductions into every other year.

Purchase Certain Big Ticket Items in 2009. Thanks to a couple of expiring temporary tax breaks, it may pay to purchase certain big-ticket items before the end of the year:

·         The optional itemized deduction for state and local sales and use taxes (in lieu of deducting state income taxes) will expire at the end of this year unless Congress takes further action. Therefore, if you live in a state with low or no state income tax and plan on making big-ticket purchases (such as a car, boat, or motorcycle, or airplane) in the near future, you may want to go ahead and make the purchase this year to cash in on the expiring sales tax break for 2009. There is no AGI based limit for this deduction, but you have to itemize to benefit and it is not allowed for AMT.

·         If you live in a state with high state income taxes and plan on deducting state income taxes instead of state sales taxes this year, legislation passed earlier this year created a one-year federal income tax deduction that might interest you. For 2009, you can deduct state and local sales and excise taxes on purchases of new (not used) passenger autos, pickups, and SUVs, as well as motorcycles and RVs made between 2/17/09 and 12/31/09. The write-off is limited to the amount of taxes on the first $49,500 of purchase price. However, a phase-out rule can reduce or completely eliminate the break if your AGI exceeds $250,000 ($125,000 if you are single). 

Ideas for Investments

Harvest Capital Losses. If you are sitting on some investments that have dropped in value since you acquired them, now might be a good time to dump part or all of them to cut your tax bill. You can deduct capital losses up to the amount of any capital gains that you’ll have for the year (for example, from mutual fund distributions or sales of stocks or bonds). Also, you can claim up to an additional $3,000 of losses ($1,500 if you’re married but filing a separate return) against your other income. Any losses in excess of these amounts carry over to next year.

If you’re selling less than your entire interest in an investment, you can maximize the amount of deductible loss that you realize by telling your broker or mutual fund company to sell the highest basis shares first (and then have them confirm your instructions in writing within a reasonable time after the sale). In addition, if you think your investments that are currently underwater are poised for a comeback, you can buy them back after taking a loss as long as you don’t reacquire them within 30 days before or after the sale.

Take Advantage of 0% Capital Gains Rate before It is Too Late. For 2009, the federal income tax rate on long-term capital gains and qualified dividends is 0% when they fall within the 10% or 15% regular federal income tax rate brackets. This will be the case to the extent your taxable income (including long-term capital gains and qualified dividends) does not exceed $67,900 if you’re married and file jointly ($33,950 if you’re single). This 0% rate will likely continue to apply in 2010, but is scheduled for repeal in 2011.

Secure a Deduction for Nearly Worthless Securities. If the dismal economy has left you with securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier to just sell the security if it has any marketable value. As long as the sale is not to a close family member, this allows you to claim a loss for the difference between your tax basis and the proceeds.

Ideas for Your Business

Consider Paying a Dividend in 2009. If you’re a shareholder in a closely held C corporation, the current federal income tax rate structure is helpful to your cause. If the company pays you a taxable dividend, the maximum federal rate is only 15%. The maximum federal rate on dividends is scheduled to skyrocket from the current 15% to 39.6% starting with 2011.

Take Advantage of Temporary Tax Breaks for Equipment and Software Purchases. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property, you might consider doing so before year-end to maximize your 2009 deductions. Here’s why:

·         Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2009, the maximum Section 179 deduction is a whopping $250,000. However, the allowable deduction is reduced dollar-for-dollar to the extent the amount of qualifying property placed in service during the year exceeds $800,000. For tax years beginning in 2010, the maximum deduction is estimated to drop back to about $134,000, with reductions estimated to begin when more than $530,000 of qualifying property is placed in service.

·         50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost (reduced by the Section 179 deduction) of most new (not used) equipment and software acquired and placed in service by December 31 of this year. The 50% first-year bonus depreciation break will expire at year-end unless Congress takes further action.

Avoid the Hobby Loss Rules. A lot of businesses that are just starting out or have hit a bump in the road thanks to the dismal economy may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business’s losses aren’t deductible because the activity is just a hobby for the owner. Surprisingly, the IRS has been fairly successful recently in making this argument when it takes taxpayers to court. Thus, if your business is expecting a loss this year, we should talk before year-end to make sure we do everything possible to maximize the tax benefit of the loss and minimize its economic impact.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has an FSA, before year-end you must specify how much of your 2010 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying child care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2009, consider bumping up the Federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90% of your estimated 2009 liability or, if smaller, 100% of your 2008 liability (110% if your 2008 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), interest and penalties will be minimized, if not eliminated.

Ideas for Seniors Age 70½ or Older

Make Charitable Donations Directly from Your IRAs. If you’ve reached age 70½, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to the public charity of your choice (such as your church or other favorite charity). The distribution is federally income tax free. You don’t get to claim it as an itemized deduction on your Form 1040. However, the tax-free treatment equates to a 100% write-off, and you don’t have to itemize your deductions to get it. Additionally, since it is tax-free, it may reduce your Social Security benefits subject to tax. Be careful though—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity (you can’t receive cash and then donate it). Also, this provision expires at the end of 2009 unless Congress extends it. So, this could be your last chance.

Don’t Take Your Minimum Required Distribution for 2009. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. However, a temporary tax law change made in late 2008, waives the minimum distribution requirement for 2009. This means you can leave the amounts in your account without suffering the 50% penalty. This waiver applies to IRAs and defined-contribution plans, including distributions from 401(k), 403(b), and state-sponsored 457(b) accounts and is available to everyone regardless of their total retirement account balances.

Bottom Line: If you haven’t already received your required distribution during 2009 and you do not need the funds, you can just leave them in your retirement account for another year. If you have already received the distribution and now wish you hadn’t, you may be able to roll the funds back into your retirement account, even if the normal 60-day rollover period has already expired. However, this may require action before 11/30/09. If this situation applies to you, please give me a call.

                                                         Environmentally Friendly Ideas

Make Energy Efficiency Improvements to Your Home. A great way to cut energy costs and save up to $1,500 in federal income taxes this year is to make energy efficiency improvements to your principal residence. Basically, if you install energy efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans to your home during 2009 or 2010, you may be entitled to a tax credit of 30% of the purchase price, up to a maximum credit of $1,500. For 2009, the credit is allowed against the AMT. However, unless Congress changes the rules, this will not be the case for 2010. If there is any possibility you’ll be subject to AMT next year, you may want to make these improvements this year.

Purchase a Qualifying Hybrid or Lean Burn Technology Vehicle If you have been considering purchasing a new hybrid or lean-burn technology vehicle, now may be a good time to do so. First of all, as we discussed earlier, the sales tax paid on the vehicle may be deductible. Secondly, purchasing a qualifying new (not used) vehicle this year may reap you an alternative motor vehicle tax credit from around $900 to $3,000, depending on the vehicle, which in 2009 can offset the AMT. However, not all 2009 purchases qualify as credits are phased out once the manufacturer has sold over 60,000 qualifying vehicles. Because of this rule, no credits are allowed for 2009 purchases of Toyota, Lexus, and Honda hybrids and only reduced credits are available for Ford and Mercury hybrids. So far, full credits are still allowed for hybrids made by Chrysler, GM, Mazda, and Nissan. Full credits are also allowed for lean-burn technology vehicles made by Mercedes, Volkswagen, BMW, and Audi. Give us a call if you want to know the available credit amount for a specific hybrid or lean-burn technology vehicle.

Ideas for Your Estate

The federal estate tax exemption for 2009 is $3.5 million. For 2010, the federal estate tax is supposed to be repealed—but just for that one year. It now seems clear that if the promised repeal ever happens at all, it will just be for 2010. The more likely scenario is that we will continue to have a federal estate tax for 2010 and beyond with a $3.5 million or somewhat larger exemption. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan.

Make Annual Gifts to Reduce Your Estate. Whittling your estate down by making annual gifts continues to be a tax-smart strategy. If you have some favorite relatives or unrelated persons, you and your spouse both can give each of them up to $13,000 this year. These gifts will reduce your estate tax exposure without any adverse gift tax effects. Making multiple gifts over multiple years can dramatically reduce your exposure to the estate tax. So, the sooner you start an annual gifting program, the better.

Capitalize on Depressed Security Values to Boost Giving Power. The current depressed security values may mean that more assets can be transferred within the limits of the gift tax annual exclusion amount ($13,000 for 2009) and the lifetime applicable exclusion amount ($1 million). Thus, if a security’s value is expected to participate in the inevitable (we hope) economic recovery (and especially if the security is expected to significantly appreciate) this may be the perfect time to give the security to the intended recipients. However, do not give away loser shares (currently worth less than what you paid for them). Instead, sell the shares, and take advantage of the resulting capital loss, and then give away the cash.

Detailed Federal Employment Tax Audits to Begin in November

There is an old proverb, the age and source of which I do not know, that states, "a word to the wise is sufficient".  No words more accurately describe the reaction small business employers should have to the news that the Internal Revenue Service will initiate a nationwide, intensive audit program know as a National Research Program (NRP).  The goal of the IRS National Research Program is to collect data that will help the IRS “improve its compliance programs and better use its resources.” As a result, this NRP study involving employment taxes (Form 941 and Form 940) is currently under development. During the project, the IRS will conduct detailed employment tax examinations of certain taxpayers with the program beginning in November. In fact, the selection process for an NRP audit has already begun. The Service reiterated that is based “on a statistical sample and it does not necessarily mean that an employer has incorrectly filed a return.” The program is scheduled to last for three years and “could easily encompass 2,000 tax examinations during each of the three years.

Although the IRS may look at any line on an employment tax return during the examination, it will primarily focus on the following issues:

(1) worker classification (employee vs. independent contractor)

(2) fringe benefits

(3) officer's compensation

(4) reimbursed expenses (ascertaining whether accountable plans meet the needed requirements).

The IRS is now expected to do more of these random employment tax audits than it first planned: About 6,000 exams will be done over three years vs. the 4,500 originally scheduled. And, the Service is getting plenty of potential leads especially in the area of misclassified workers. In the last year alone, “tens of thousands” of Form 8919 (which is used by taxpayers who insist that they are being incorrectly treated as independent contractors) have been filed with the IRS by workers claiming that they do not self employment tax on their earnings.

Vehicles with GVWRs Above 6,000 Pounds[1]

If widely fluctuating energy costs and environmental concerns have you looking for ways to go green, here are some tips on how going green can cut energy costs and reap tax saving energy credits. Better yet—all of these tax credits are available against Alternative Minimum Tax (AMT) this year and none of them are subject to any annoying phase out limits designed to prevent higher income taxpayers from benefiting from them. So, just about everyone should be eligible to take advantage of these tax saving credits.

Making Energy Efficient Improvements to Your Home

A great way to cut energy costs and save up to $1,500 in federal income taxes is to make certain energy efficiency improvements to your home. You just need to be sure to pick the right product.

The credit (which is called the nonbusiness energy property credit) you’re entitled to equals 30% of what you pay for (a) qualified energy efficiency improvements (such as, certain energy efficient insulation, windows, doors and roofs), and (b) qualified residential energy property (such as, certain energy efficient heat pumps, hot water heaters or boilers, and advanced main air circulating fans) on your principal residence (no vacation homes). Expenditures made from subsidized energy financing can qualify for the credit if they otherwise meet the requirements for those credits. However, there is a $1,500 cap on aggregate credits claimed in 2009 and 2010 for all types of eligible expenditures. In other words, the $1,500 cap applies to the aggregate amount of credits claimed in both years combined.

A good place to start your search for products that qualify for this credit is at www.energystar/taxcredits where you’ll find a table listing requirements for various products. Then, to ensure the product satisfies the required energy saving conditions for the nonbusiness energy credit, be sure to check the product package materials or manufacturer website before making the purchase. According to the IRS, you can rely on the manufacturer’s written certification statement, which is typically included with the product package materials or on the manufacturer’s website. You just need to keep a copy of this certification as part of your tax records.

Purchasing a Hybrid Vehicle

If you are considering a hybrid vehicle purchase in 2009, the hybrid vehicle credit of up to $3,400 may be enough to get you going. Thanks to the Stimulus Act, the really good news for 2009 purchases is that the credit is now allowed against AMT. Top this with the fact that the credit has no AGI phase-out limit and you’ve got a whole new ballgame. But, you need to be careful—the amount of credit available depends on the hybrid you buy and some of the most popular models are no longer eligible for the credit. Also, only purchases of new (not used) vehicles qualify.

The actual credit allowed varies by vehicle. Furthermore, the credit is phased out once a manufacturer sells 60,000 hybrid vehicles. Lexus, Toyota, and Honda all hit this mark in previous years, so no 2009 purchase of their hybrids qualifies for a credit. Ford and Mercury hit this mark in the last quarter of 2008. This means the full credit will be allowed for purchases of their hybrids through 3/31/09, 50% of the credit will be allowed for purchases made from 4/1/09–9/30/09, and 25% of the credit will be available for purchases made from 10/1/09–3/31/10. So, if you’re interested in a Ford or Mercury hybrid, you’ll want to make the purchase before 10/1/09 to get 50% (rather than 25%) of the credit.

Using the Solar, Wind, Geothermal or Fuel Cell Energy to Power Your Home

Although the costs of qualifying expenditures tend to be pretty steep, if you install solar, wind, geothermal, or fuel cell energy saving equipment in 2009, you may be able to take advantage of the residential energy efficient property (REEP) credit. The REEP credit equals 30% of expenditures to install: (1) qualified solar water heating equipment, (2) qualified small wind energy equipment, (3) qualified geothermal heat pumps, (4) qualified solar electricity generation equipment, and (5) qualified fuel cell equipment (up to $1,000 per kilowatt hour). Expenditures made from subsidized energy financing can qualify for the REEP credit if they otherwise meet the requirements for those credits.

The credit only applies to equipment you place in service in your U.S. residence, and it cannot be claimed for equipment used to heat a swimming pool or hot tub. The credit for fuel cell equipment is only available for your principal residence; however, the two solar credits apply to any residence (including vacation homes).

As with the nonbusiness energy property credit, a good place to start your search is at www.energystar.gov/taxcredits . Then, be sure the product satisfies the required energy saving conditions for the REEP credit, be sure to check the product package materials or manufacturer website before making the purchase. According to the IRS, you can rely on the manufacturer’s written certification statement, which is typically included with the product package materials or on the manufacturer’s website. You just need to keep a copy of this certification as part of your tax records.

Conclusion

As you can see, there are some pretty nice tax savings to be had from making certain energy saving and environmentally friendly expenditures in 2009.

If you have any questions or need any assistance, please give us a call.