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November, 2009 Tax Tip

WOW, Is Year-end Tax Planning Ever Important In 2009!


Every year in November I have devoted my Tax Tip to the importance of proper year-end tax planning.  While there have been some recent positive signs that the economy may be improving in some areas, the fact is we are still mired in the midst of a credit freeze and a jobless recovery. One very good way to help ease the financial pain is by minimizing your tax burden.  Many recently enacted tax breaks and anticipated tax law changes for the near future make year-end planning for 2009 more important than any year in recent history. 


There are the usual year-end tax considerations, such as whether to accelerate (into 2009) or defer (to 2010) income and expenses; security transactions; planning to avoid the alternative minimum tax (AMT) and potential estimated tax penalties; and retirement and education planning.  This year you need to also consider the multitude of temporary beneficial tax provisions that were contained in legislation enacted in 2008 and 2009 that first became effective in 2009 or are scheduled to expire by the end of 2009 unless Congress acts to extend them.   You certainly don’t want to miss the boat on these! 


One extremely important tax break (relating to the conversion of a regular IRA to a Roth IRA) goes into effect in 2010.   There are also some important developments that occurred during 2009 that may apply prior to 2009, such as Madoff type theft losses, capital gains treatment for sale of subdivided lots, and deductibility of credit and debit card fees for electronic tax payments.


Major provisions, effective in 2009, that will expire after 2009 unless Congress acts to extend them include:


  • Exclusion from income of up to $2,400 of unemployment compensation
  • Maximum $250 deduction for expenses of elementary and secondary school teachers
  • Reduction in the AMT exemption
  • Deduction of state and local general sales taxes
  • Deduction for higher education costs
  • Additional standard deduction for real property taxes
  • Deduction for taxes paid on qualified new vehicle purchases
  • Tax-fee IRA distributions to charities of up to $100,000 for those 70½ and older
  • Waiver of required minimum distributions from IRA’s and profit sharing plans
  • $250 economic recovery payment to social security recipients
  • 10% first-time homebuyer’s credit up to maximum of $8,000 (expires 11/30/09)
  • Increased expensing deduction (up to $250,000) of business property placed in service
  • 50% bonus depreciation deduction for new business property placed in service
  • Additional $8,000 first year depreciation for autos and trucks 6,000 pounds or less
  • Rule requiring $100,000 or less AGI for conversion to Roth IRA


Note:  It is expected that Congress will act to extend several of these expiring provisions including the first time homebuyer’s credit and the $250,000 expensing of business property.  However, as of this date they are set to expire. 



Major provisions, effective in 2009, that extend beyond 2009:


  • Estimated tax relaxation for individuals with small businesses
  • Expanded and enhanced Hope (now American Opportunity) tuition tax credit
  • Making Work Pay refundable tax credit
  • Up to $1,500 credit for qualifies energy-efficient home improvements
  • Qualifying “private activity” bonds exempt from AMT add-back
  • Increased earned income tax credit
  • Refundable portion of child tax credit increased
  • Deferral of income recognition on forgiveness of business debt


Looking ahead, even if Congress takes no affirmative action to increase current tax rates, after 2010 the top tax rates for ordinary income and dividend income will automatically increase to 39.6% (from 35%), and the maximum rate for long-term capital gains will increase to 20% (from 15%).  The foregoing tax developments as well as the scheduled future tax rate increases require careful analysis in determining your recommended 2009 year-end strategies.  Always be mindful of the fact that any tax plan of action is only as current as today’s law.


I strongly advise that you consult with a knowledgeable tax practitioner regarding your 2009 year-end planning as soon as possible, even if you have never done so previously.


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