As the end of the year approaches, it is a good time to think of methods that can help lower your tax bill this year and possibly next. Factors that compound the challenge include the stock market's swoon (and partial recovery), the difficult economic climate we are in right now, and the strong possibility that there will be tax changes in the works over the next few years.
The indisputably good news we are certain of is that Congress has once again acted to "patch" the alternative minimum tax ("AMT") problem for 2009; has provided other AMT relief, has reinstated and/or expanded a number of tax breaks (such as the tax deduction for state sales and excise taxes paid on the purchase of new cars, including light trucks, SUV's, motorcycles and motor homes; an enhanced tax credit for higher education expenses; and a 65% subsidy for COBRA premiums for up to nine months. For 2009, businesses continue to enjoy tax breaks such as a beefed-up expensing option under Code Sec. 179; a 50% bonus first-year depreciation writeoff for most new machinery, equipment and software placed into service this year; deferral on debt discharge income from reacquisitions of debt; reduced capital gains for holders of qualified small business stock; and shortened S corporation built-in gains holding period. Certain favorable employee benefit changes were also enacted in the current year legislation known as the American Recovery and Reinvestment Act of 2009 ("ARRA").
We have compiled a checklist 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 will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
- Increase the amount you set aside for next year in your employer's health flexible spending account ("FSA") if you set aside too little for this year. Do not forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
- If you become eligible to make health savings account ("HSA") contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2009.
- 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. It may be advisable for us to meet to discuss year-end trades you should consider making.
- 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 ("AGI"). These include IRA and Roth IRS 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, or if the tax rates for next year are increased.
- Many observers expect that the top tax rates for high income taxpayers will increase in 2010 and beyond. You may wish to consider accelerating income (particularly long term capital gains that have been reported on the installment sale method) into 2009 in order to take advantage of the current rates.
- 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 Roth IRA's if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009. On a related note, effective January 1, 2010, even taxpayers with higher income are eligible for establishing of, or conversion to, Roth IRAs.
- It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010.
- 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.
- Consider using a credit card to prepay expenses that can generate deductions for this year.
- If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009.
- Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
- You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
- Estimate the effect of any year-end planning moves on the AMT for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
- If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, a credit of up to $500 may be available for such improvements if made this year.
- Substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credit will be larger this year than last for expenses over $6,667.
- If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it is eligible for the credit, and, if so, purchase it before year-end.
- You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
- Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option (under IRC §179) for assets bought and placed in service this year; the maximum expensing amount will drop to $25,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets), and the expensing option is phased out if property placed in service during the year exceeds a ceiling which is $800,000 for 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally will not be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- If you are self-employed and have not done so yet, set up a self-employed retirement plan.
- 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 cannot carry over unused exclusions from one year to the next.
- If you are thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
- If you are age 70½ or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.
- If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.
- Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
- Depending on your particular situation, you may also want to consider triggering a debt-cancellation event in 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
- If you have losses from businesses that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions.
- Consider taking advantage (or assisting a younger generation family member in taking advantage) of the first time homeowners tax credit, in the amount of 10% of purchase price of the residence, not to exceed $8,000 if purchased prior to December 1, 2009.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.