Top Tax Savers for 2009 (and Into 2010)
If eligible, you can save taxes in 2009 by taking a number of steps before year-end.
“Our CPAs compiled a list of the latest tax developments and top year-end tax strategies for individuals, executives, financial professionals, and other business leaders in all of the industries we serve,” states Andy Biebl, tax principal with LarsonAllen.
When it comes to lowering your tax bill, we believe the following credits and new developments are worth consideration.
Credit for new and existing homeowners
There is a refundable tax credit for first-time homebuyers (those who have not owned a home in the past three years). The credit is computed as 10 percent of the purchase price of the residence up to $8,000. Congress extended this credit through June 30, 2010, with the requirement that a binding contract be in place by April 30, 2010, for closings during May and June.
In addition to extending the credit, Congress liberalized the income eligibility test. For purchases made after November 6, 2009, single filers qualify for the full credit if their adjusted gross income (AGI) is under $125,000, and joint filers are eligible until their income exceeds $225,000.
Furthermore, existing homeowners who have owned and occupied the same principal residence for at least five of the preceding eight years now also qualify for a tax credit on the purchase of a different residence after November 6, 2009. For these taxpayers, the credit is also 10 percent of the purchase price, but is limited to $6,500.
For more information on the homebuyer credit, read our story, “Homebuyers and Businesses With Operating Losses Get Boost in Tax Bill.”
Expanded college tax credit
The former Hope credit was revamped and relabeled the American Opportunity credit, and now more parents and students will qualify for money savings to help pay for college expenses. This tax option produces an annual credit of up to $2,500 per student on as little as $4,000 of post-secondary tuition and books. It’s accessible to a broader group of taxpayers because the income phase-out threshold is increased to $80,000 for single filers and $160,000 for joint filers.
“If your income exceeds these amounts, there are strategies where the credit can be shifted to the college student’s return to offset any federal income tax incurred by the student, including kiddie tax,” explains Biebl.
Learn more about this and other higher education tax incentives in our story, “IRS Outlines Options for Relief From Higher Education Costs.”
Residential energy credits
Congress restored the tax credit for homeowners who make energy-saving improvements, such as insulation, doors, windows, furnaces, hot water heaters, and similar investments. The credit is 30 percent of the expenditure, capped at a $1,500 cumulative credit limit for 2009 and 2010. In other words, the first $5,000 of eligible expenditures caps the credit. And unlike most other tax credits, there is no high-income phase out. In addition, there’s a high-tech version of this credit for energy-saving technology items, such as solar panels, geothermal heat pumps, etc. This tax credit is also 30 percent of the expenditure, but there is no cap. For details on these homeowner energy credits, visit
www.energystar.gov and click on the icon at the bottom titled, “
1040 Tax Credits for Energy Efficiency.”
Roth conversions in 2010
Prior to 2010, your AGI had to be less than $100,000 to convert an individual retirement account (IRA) or qualified plan to a Roth IRA. Beginning in 2010, the AGI limitations disappear, making all taxpayers eligible to convert their accounts.
The amount converted from a deductible retirement plan to a Roth IRA is included in your taxable income (less any previous non-deductible contributions to the account).You are allowed to report the income and pay the tax over a two-year period (2011 and 2012), but rates may be higher in those years. In that case, an election to avoid the deferral is appropriate.
Once in Roth status, the funds accumulate tax free and can eventually be withdrawn without taxes. Further, the Roth has no minimum required distribution (MRD) for those age 70 ½; the taxpayer decides when the dollars are withdrawn.
According to Nick Houle, a tax principal with LarsonAllen Financial, LLC, member FINRA & SIPC, “The Roth can be a powerful wealth accumulation tool.” He believes this law change presents a significant opportunity for many higher income and higher net worth individuals who can convert old IRA or retirement plans ahead of the pending tax rate increases scheduled for 2011.
“We can help clients quantify savings based on family demographics, tax situations, and personal objectives,” Houle adds.
Read our EFFECT article, “New Rules for Roth IRAs May Prompt Conversions,” to find out if a Roth conversion is right for you.
Retirement plan distributions
For 2009 only, Congress enacted a waiver of the mandate forcing those over 70 ½ to make withdraws from their IRAs and other qualified retirement plans.
“Generally, eliminating that taxable income is a solid strategy, but some low-income earners should still take the distribution to utilize their deductions and exemptions. And high net worth individuals should continue to use the tax rule that allows up to $100,000 of IRA funds to be transferred as charitable contributions,” says Houle.
Learn more about the Worker, Retiree, and Employer Recovery Act of 2008 in our story, “Retirees Should Think Strategically About One-Year Relief on MRD.”
Recession relief
There are a number of tax breaks for individuals and businesses impacted by the economic downturn through the
American Recovery and Reinvestment Act of 2009 (ARRA or stimulus act). For those who negotiate a reduction in debt in connection with their principal residence, there is a new tax-free exclusion of up to $2 million. And business debt relief, in addition to existing exclusions, can electively be deferred under a mechanism that postpones reporting of income until a five-year period commencing in 2014.
Additionally, the government is providing eligible, unemployed people and their dependents a 65 percent COBRA health insurance premium subsidy for up to nine months.
For more information, read our stories, “Tax Breaks for Individuals in 2009 Stimulus Act,” “Business Incentives in 2009 Stimulus Act,” and “New COBRA Subsidy in ARRA Changes Rules for Employers.”
Accelerating capital gains before increase
Presently, capital gains and dividends are taxed at a favorable maximum 15 percent rate. But the Obama administration’s budget proposes to increase that rate to 20 percent in 2011. You can avoid this tax increase by accelerating capital gain sales and dividends into 2009 and 2010.
Per Biebl, sales of real estate and closely held corporate stock to family members are examples of transactions that should occur sooner rather than later. “And for those receiving payments on older installment sales, there are actions that can accelerate the gain ahead of the rate increase,” he says.
Find out more about this increase in our story, “President’s Proposed Budget Increases Taxes for Higher Income Individuals.”
Itemized deductions and a break on new car purchases
Consider prepaying expenses before year-end that generate deductions, such as state income taxes, real estate taxes, charitable contributions, and other itemized deductions. In that regard, Congress is offering an incentive to purchase a new vehicle by December 31, 2009. Taxpayers are allowed to take a Schedule A itemized deduction for state or local sales and excise taxes paid on the purchase of qualified motor vehicles. This deduction is limited to the tax amount paid on the purchase price of a qualified vehicle up to $49,500, assuming a single taxpayer’s income is under $125,000 or a joint filer is under $250,000.
Learn more in our story, “Tax Breaks for Individuals in 2009 Stimulus Act.”
Fully document charitable contributions
Several recent court cases have emphasized the importance of carefully adhering to charitable documentation rules. In the 2008 case of Gomez v. Comm’r, a donor had more than $6,000 in cancelled checks made out to his church, but lacked a receipt that was dated before his tax return filing date. The deduction wound up being disallowed, because each check exceeded $250 and was not supported by a receipt, which is now required by the tax law. Also, be cautious when keeping records on large donations for household goods or clothing to charity. An independent appraisal is required if the total donation exceeds $5,000.
Tax issues with business losses
If you own an interest in a partnership or S corporation, you may need to increase your basis/investment in the entity so you can deduct a loss for 2009. Also, if your personal participation in this business is less than 500 hours per year, we recommend speaking with a CPA to discuss strategies for dealing with the passive loss restrictions. And for those who have incurred a business loss in 2008 or 2009, there is an important new five-year carryback election that can assist in recovering tax refunds from prior years.
For more information on the expanded business loss carryback opportunities for large and small enterprises, read our story, “Homebuyers and Businesses With Operating Losses Get Boost in New Tax Bill.”
Possible last call for bonus depreciation (businesses)
Under temporary economic stimulus provisions, Congress improved the Section 179 first-year depreciation deduction and added a front-end 50 percent bonus depreciation deduction. These 2008–2009 incentives, which are designed to encourage businesses to accelerate purchases of new equipment, vehicles, and other depreciable property, are about to end.
The 50 percent bonus depreciation applies for property purchased and placed in service from January 1, 2008, through December 31, 2009. This is in contrast with the $250,000 expanded Section 179 deduction effective date, which is available for tax years beginning in 2008 and 2009 (extends through the 2009–2010 year for fiscal filing businesses). Thereafter, the Section 179 deduction will drop back to $134,000 per year.
For more information on these ARRA tax incentives for businesses, read “Business Incentives in 2009 Stimulus Act.”
Updated gift and estate tax exclusions and exemptions
By using the annual gift tax exclusion before year-end, you may give $13,000 to an unlimited number of individuals to reduce the costs of an expensive 45 percent federal estate tax to your heirs. This annual exclusion remains at $13,000 for 2010 as well.
Biebl anticipates that Congress will soon extend the present estate tax system, leaving the per-person exemption at $3.5 million, and the rate at 45 percent on net worth in excess of that exemption. “Gift planning and other estate reduction strategies remain very important for those with a net worth over this exemption amount.”
Lock in low IRS interest rates
Seller-financed sales can be set in place using today’s low IRS interest rates (roughly four percent on long-term financing). These rates present opportunities for people looking to reduce potentially taxable estates, or simply attempting to transfer a business or other assets to heirs. And there are strategies that can mix gift and charitable transactions to leverage your ability to pass assets to the next generation.
How we can help
For help tailoring a year-end plan that results in tax advantages for you, your family, or your business, contact a
LarsonAllen tax principal in your region.