2009, 2010 Tax Planning

• The rules limiting itemized deductions and personal exemptions when adjusted gross income (AGI) exceeds certain thresholds do not apply in 2010.
• The 15% and 0% tax rates on long-term capital gains and qualified dividends are set to expire after 2010. In 2011, a 20% maximum capital gains rate generally will go into effect, and the dividends will be treated as ordinary income. So, no more special tax rate will apply to dividends.
• Regular individual income tax rates are also scheduled to increase after 2010. Unless new legislation is enacted, the 10% rate will dissapear and the top four pre 2001 tax brackets of 28%, 31%, 36% and 39.6% will be reinstated. The lowest bracket will then be 15%, not 10%.
• Starting in 2010, the income and filing status restrictions and converting a traditional IRA into a Roth IRA no longer apply.
• Businesses engaged in manufacturing, construction and certain other domestic productions activities may deduct 9% of qualified production activity income, up from 6% in 2009 - but other limitations apply.
• Employers with 500 or fewer employees have a new retirement plan option beginning in 2010 called the DB(k) plan.

On planning the timing of your tax deductions . . .

Evaluate your tax situation over a two year time period for both 2009 and 2010. This may allow you to trim your overall tax in both years by shifting income and deductions between years. Generally, your objective is to defer income and accelerate deductions. If you have minimal itemized deductions you may be able to "bunch" them in one year allowing itemized deductions in one year and a standard deduction in another year. For example: state and local taxes. charitable contributions and interest expense.

Maximize your interest deductions by paying off credit cards, personal auto and other loans with money from a home equity loan of up to $100,000. The interest on the home equity loan will generally be deductible whereas interest paid on credit cards and personal loans is not.

Tax strategies of making charitable contributions . . .

Consider contributing publically traded stock you've held longer than one year and you can avoid the capital gains tax on any price appreciation while at the same time still allow you to deduct the stock's full market value on the date of gift. You don't get the same tax break for contributions of appreciated stock held less than one year however and your deduction in this case would be limited to your cost basis in the stock. Note that given the recent losses in the stock market if you are holding stock which has declined in value, you will obtain a better tax result by selling the shares and contributing the proceeds than your would by donating the shares outright. The reason is because you will be able to deduct the capital loss as well as your charitable contribution.

Tax tips on your home . . .

Mortgage interest is deductible as is real estate taxes. Generally, if you pay points on your mortgage when you purchase your home, those points are deductible in full in the year your purchase the home. But, you can also choose to deduct them ratably over the life of the loan. This may make sense if you purchase your home very late in the year and will not otherwise have enough deductions to allow you to itemize in the year you make the purchase.

Points paid on refinancing a mortgage on the other hand are not fully deductible in the year the transaction takes place. Rather, the points can only be deducted ratably over the life of the new loan term. Remember to write off any remaining unamortized points though if you then subsequently sell the home and pay off the mortgage.

Also, new for 2007, mortgage insurance will be deductible.

Selling your home may allow you to walk away with a tax free gain.

Tax credits for home improvement . . .

Thre are a number of tax incentives designed to encourage taxpayers toward energy conservation and green technology. For example, you may benefit from a 30% tax credit for amounts you spend to make qualified energy-efficient improvements to your principal residence (subject to a combined $1,500 credit limit for 2009 and 2010). Assuming they meet energy-efficiency standards, the following improvements can qualify for the credit: Insulation, exterior windows and skylights, exterior doors, roof (asphalt, metal), central air conditioning, advanced main air circulating fan, water heater (natural gas, propane, oil, electric heat pump), hot water boiler (natural gas, propane, oil) electric heat pump.

There is also a separate 30% residential energy-efficient property credit for installing solar electric and hot water systems, geothermal heat pumps, small wind turbines, and fuel cell systems. No dollar caps are placed on this credit.

Tax savings on your investments . . .

Review your investments.

Investment interest expense (ie margin interest) is deductible up to the amount of your net investment income. To the extent you do not have enough investment income to utilize the full investment interest deduction, you can carry over the excess to subsequent years.

If you are holding mutual funds that expect to pay large year end dividends consider selling the funds prior to the dividend record date if you have owned the fund for more than one year. In effect, you will have converted the dividend which is taxed as ordinary income into capital gain income which can be taxed at a lower rate. If you sell a fund at a loss, be aware of the wash-sale rule if you then want to go back into the same fund which could prevent you from utilizing the loss.Be wary of buying mutual funds late in the year in any non-retirement account.

On avoiding tax underpayment penalties . . .

If you are facing an underpayment tax penalty for failing to make sufficient estimated payments toward investment or other sources of income during the year, increase the amount of your employee W-2 withholding tax. In order to avoid underpayment penalties you need to prepay 90% of 2010 actual tax or 100% of 2009 tax (or 110% if Adjusted Gross Income for 2009 was more than $150,000 - married filing jointly). Estimated tax payments cannot be "made up" at year end (unless that is when the additional income was actually earned). However, employee withheld taxes are treated as being paid evenly throughout the year. Therefore, extra withholding late in the year can overcome prior underpayments.On maximizing your charitable contribution deductions . . .

On taking maximum benefit of retirement plans . . .

Take full advantage of the tax benefits associated with employer-sponsored retirement plans and individual retirement accounts to help you build your retirement savings. Workplace plans such as 401(k), 403(b) and SIMPLE plans all offer the opportunity to (1) make pretax contributions which are not subject to income taxes until you receive distributions from the plan and (2) allow tax-deferred earnings growth because IRS does not tax the interest, dividends or capital appreciation in these accounts until you actually take distributions. This allows your investment balance to grow faster than it otherwise would if your were paying income taxes on your profits each year.

IRA annual contributions are limited to $5,000 ( or $6,000 if you are over age 50).

Roth IRA offers nondeductible contributions and potentially tax-free withdrawals after five years once you are at least age 59 1/2 or pay up to $10,000 of first-time homebuying expenses or on account of a disability. One of the biggest advantages with the Roth IRA is that distributions to account beneficiaries ater death are also tax free as long as the five year requirement has been met. As with all IRA, certain contributory restriction, phase-outs etc may apply. So, be sure to check with your tax professional first.

Traditional IRA's allow you to take a tax deduction for your contributions if you (and spouse if married) are not eligible to participate in an employer retirement plan. Again, there are certain restriction and phase-out associated so it is best to check with your tax advisor.

On education related tax benefits . . .

The deduction for education interest of up to $2,500 is available even to non-itemized taxpayers. The interest is only deductible if the loan was used to pay higher education expenses for you, a spouse, or your dependent at the time you incurred the debt. However, the deduction is phased out for single taxpayers with modified AGI between $50,000 and $75,000 or between $100,000 and $150,000 for a married filing joint return.

You can deposit up to $2,000 per year into an Education Savings Account for a child up to the age of 18. Although you cannot take a tax deduction for the contribution, the investment earnings that build up tax free over time and are not taxed at withdrawal so long as the money is used to pay the qualified education expenses of the child. Keep in mind, however, there are income phase-out ranges to be considered before making contributions. Also, the maximum deduction is slated to drop to $500 after 2010.

Section 529 plans offered by states are another good idea to consider. While the contributions you make into the plan are not deductible on your tax return for federal purposes, they are for PA purposes. When distributions are used for "qualified" student higher education expenses they are tax free. Qualified higher education expenses include tuition, fees, books, supplies, equipment required for the student's enrollment or attendance and epxneses for special needs services. Room and board cost for a student who is enrolled at least half time also qualify - subject to limitations.

American Opportunities Tax Credit - This credit equals 100% of the first $2000 of qualifying higher education expenses and 25% of the next $2,000 of expenses, up to a maximum credit of $2,500 for each eligible student in your family. The credit is available for any of a student's first four years of college. Tuition payments and certain related expenses, including books and other required course materials, are eligible for the credit. However, there are AGI phase-out limits.

Lifetime Learning Credit -You may qualify for this credit if you don't meet the requirements for the American Opportunties Tax Credit. It's available for each year of post-secondary education, including graduate school and eligible job training. The maximum credit is $2,000 (20% of up to $10,000 of qualified tuition and related expenses) per taxpayer return. Again, it to is subject to certain AGI phase-out ranges. You may not claim both education credit sof the same student's expenses, and neither credit is available to a married taxpayer filing seperately.

On home office tax deductions for self-employed . . .

More self-employed individuals working out of their home will find it easier to qualify for a home office deduction. Those who regularly use their home for management or administrative tasks and have no other location where these functions are performed may now qualify for the home office deduction. If you qualify, you may be able to take a deduction for expenses such as utilities, maintenance and depreciation. Also, if you are a Schedule C filer, the partial allocation of mortgage interest and real estate taxes to home office expenses will also lower the self employment taxes on the business net income. To qualify, you must use the designated area of your home exclusively and regularly as: (1) your principal place of business (2) As a place of business where you meet with patients, clients or customers in the normal course of business. If you are an employee rather than a business owner, you must be able to demonstrate that the reason for the home office use was due to the convenience of the employer - not solely for your convenience.

Tax savings in your business . . .

If you operate your own business certain new business equipment purchases up to $125,000 can be written off as an expense for 2009 under IRS code sec. 179. Therefore, if you had planned to make capital asset purchases anyway, you may want to accelerate the purchase into 2009. However, the maximum expense deduction is reduced dollar for dollar by the cost amount of qualified property placed in service during the year in excess of $430,000. Other requirements and restrictions apply as well depending on the business entity type. We advise you to seek our guidance in this area first, however, as certain rules apply to these transactions.

Hire your children in a family business, be sure to treat them the same as any other employee, and deduct their salary on the business return which will reduce federal, state and local income taxes as sell as your self-employment taxes. A dependent child may earn as much as $5,700 in 2010 income tax free because of their standard deduction. Then, for wages over this amount it will be subject to their lower tax rates as well.

In addition to a standard deduction, a child with earned income can also take a $5,000 IRA deduction meaning the child can earn up to $10,700 tax free. Also, children under the age of 18 who are hired by a parent's unincorporated business do not need to pay FICA taxes.

Still more tax tips to consider . . .

If your AGI is close to one of the phaseout ranges discussed in any of the above topics, consider selling investments that show a capital loss and are unlikely to recover soon so that you can lower the AGI amount. If you have children under age 18 with interest and dividends, file a separate return for the children rather than elect to report the children’s income on your return. This will also serve to reduce your AGI.

Alternative Minimum Tax is affecting more taxpayers. The AMT rates are 26% and 28%. You could possibly fall into a situation of owing AMT tax in addition to your regular tax if any of the following situation apply: (1) You receive tax-exempt interest from private activity bonds issued after 8/7/86 (2) You exercise incentive stock options (3) Are claiming a high number of dependent exemptions (4) Are claiming a large itemized deduction for job or other miscellaneous expenses on Schedule A (5) Are claiming a large itemized deduction for state and local tax payments.

And finally . . .

Remember, the time for implementing tax planning strategies is before the end of the year. The above tax topics are intended only as a generalized overview of some of the tax planning strategies you can implement and should not be relied upon as an all encompassing analysis on the subject. There are always many exceptions, phase-outs, limits etc to consider in the above suggestions. Therefore, our staff is available to assist you with any questions or tax planning strategies. Call us if you wish to schedule an appointment.