Year End Tax Planning!
So while the end of the year is filled with lots of fun stuff—holidays, gift-giving, family visits, etc., it is also the time of year to think carefully about your taxes because once December 31st has come and gone, your tax liability for the 2009 tax year will be set in stone.
Especially this year, when Congress has inserted a handful of powerful but temporary tax breaks to get the economy moving again, you do not want to overlook any deduction or credit that you can take in 2009 to lower this year’s tax bill. Managing what income you recognize or defer also can pay dividends as you focus on balancing your tax rates between 2009 and 2010, and beyond, with tax reform on the horizon.
I wanted to bring to your attention just a few of the tax law changes below, which have taken place to stimulate the economy and those now on the horizon to pay for the recovery.
First-time homebuyer credit. The first-time homebuyer credit is one of the most popular tax incentives in recent years. However, it is not a permanent tax break. It is temporary. Its originally scheduled expiration date of November 30, 2009 prompted Congress to extend and expand it.
Originally, the credit was limited to $8,000 ($4,000 for a married taxpayer filing separately) for first-time homebuyers only.
The new law extends the credit for principal residences purchased (contract signed) on or before April 30, 2010 with escrow closing on or before July 1, 2010. Members of the U.S. armed forces, foreign service and intelligence community may have additional time to claim the credit if they are serving on qualified official extended duty outside of the U.S.
The new also extends a special rule that could boost your expected tax refund. Eligible taxpayers can elect to treat a qualified purchase of a principal residence after December 31, 2009 as made on December 31 of the calendar year preceding the purchase. For example, if you purchase a qualified principal residence on March 2, 2010 and you are eligible for the credit, you can elect to treat the purchase as made on December 31, 2009 and claim the credit on your 2009 return. This treatment could result in a larger refund in 2010 depending on your personal tax situation. Otherwise, you could wait and claim the credit when you file your 2010 return in 2011. This election needs to be reviewed carefully. A qualified accountant can help you decide when to claim the credit to maximize your tax savings.
Until now, the credit was limited to first-time homebuyers. The full credit (the $8,000 credit) is still limited to first-time homebuyers. However, current homeowners are now eligible for a credit of $6,500 as long as they have owned and used the same residence as their principal residence for any five consecutive year period during the previous eight years. This provision is intended to help younger homeowners who are trading up and seniors who may be looking to downsize.
Another change in the new law is notable in enabling many more taxpayers to take advantage of the credit. Congress raised the income phase-outs for the credit. Previously, the credit phased out for single individuals with modified adjusted gross income (MAGI) between $75,000 and $95,000 and for married couples filing joint returns with MAGI between $150,000 and $175,000. Under the new law, phase out starts for single individuals with MAGI at $125,000 and for married couples filing joint returns with MAGI at $225,000.
The homebuyer credit can be very valuable. The credit is also very complex. In addition to the provisions described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Consult a qualified tax accountant for the most accurate information.
Planning for deductions and credits at year-end can also get complex but can be equally as rewarding. Timing and qualification rules create traps and opportunities:
* Pre-paying certain expenses, such as real estate taxes or mortgage interest, do not necessarily translate into a larger deduction this year.
* Paying a spring college tuition bill in late December instead of early January, however, can impact whether you maximize the benefit of the new American Opportunity Tax Credit for both 2009 and 2010.
* Year-end charitable giving generally has always been a smart way to reduce current year taxes but strict timing rules and revised substantiation requirements for property donations cannot be overlooked.
* Homeowners should also not ignore taking advantage of the new residential energy property credit which has a unique set of rules on qualifying expenses and deadlines for installations.
Expiring Tax Incentives. Many of the tax breaks in recent stimulus tax bills will expire at the end of this year. At this point, Congress cannot be counted on to extend any of them for 2010:
* For individuals, these expiring provisions include the itemized state and local sales tax deduction, the $4,000 higher education tuition deduction; the additional standard deduction for real property taxes; and the above-the-line $250 teachers’ classroom expense deduction.
* For businesses, bonus depreciation and enhanced “section 179 expensing,” both designed to temporarily encourage business to make capital investments, likely will be headed for extinction at the end of 2009.
Tax Bills for 2010 and beyond.
* In 2010, the opportunity to convert any IRA into a Roth IRA without the long-time $100,000 income restriction has many individuals already setting aside funds. Some individuals, however, may do better to convert to a Roth IRA before the end of 2009, when the value of their accounts, and the consequential income that must be recognized on conversion, are at historic lows.
* Effective for 2011, the Obama administration has proposed to increase the income and capital gains tax rates on single individuals with incomes of more than $200,000 and married couples with incomes exceeding $250,000. For taxpayers in those groups, including unincorporated small businesses from which their owners recognize income on their individual returns, following the traditional year-end planning maxim of deferring income into next year may not work well this year. Deferring too much income into 2010 could result in overloading income next year if you are looking to accelerate income into 2010 to escape the expected higher rates in 2011. The tax increase proposals are not law yet but we do expect an increase to pay for the recovery incentives and the proposed new health care initiatives.
Penalties. Don’t forget—the IRS imposes penalties on taxpayers that fail to file returns. The new law increases two of those penalties. Effective for tax years beginning after December 31, 2009, the penalty for failure to file a partnership return increases from $89 to $195. The penalty for failure to file an S corporation return also increases from $89 to $195 effective for tax years beginning after December 31, 2009.
This information has been provided courtesy of Berson Financial Group. Additional information is available at their online newsletter at http://www.bersonfinancialgroup.com/newsletter.shtml .
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