Tax planning: 2009 tips and traps, and 2010 changes

Tax law changes for 2009 will require you to submit more information to your tax preparer to ensure that you get the most of tax credits and deductions. If the person working on your tax returns does not have all the proper information, you could pay too much or your return could be rejected.

Here is an overview of tax changes to consider when gathering your information:

* Making Work Pay Credit (“MWPC”), is a $400 credit to offset a reduction in withholdings enacted early in 2009. It is phased out for higher income and offset by the Economic Recovery Payment, described below. You could end up owing taxes if the credit does fully offset the reduction in withholdings (affects 2009 and 2010).
* Economic Recovery Payment (“ERP”) is a payment received as part of your social security benefits (for 2009 only), and affects the MWPC so that failing to report it could result in your tax return being rejected. The payment itself is not taxable.
* Government Retiree Credit (“GRC”) is for those not receiving social security, but affects the MWPC (2009 only). The new Schedule M reconciles the MWPC, ERP and GRC so you need all the information.
* First Time Home Buyer’s Credit is a $8,000 credit that applies to first time buyers purchasing between certain dates and requires a paper filing (electronic filings will not get the credit). If you buy the home in 2010, you have the option of amending your 2009 taxes for the credit. Note that this credit gets repaid over time on future tax returns beginning in 2010.
* Tax credit for long term home owners buying a new home, between certain dates, also requires a paper filing to avoid being rejected.
* American Opportunity Tax Credit (an expanded Hope Credit) allows use of the credit for two year more years than the Hope Credit, covering junior and senior years of college when the Hope Credit was not available.
* New Vehicle Purchase sales tax deduction (2009 only) is an additional Schedule A item, so long as your are not taking the general sales tax deduction.
* Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
* The Cash for Clunkers voucher is not considered income (2009 only).
* A tax refund can be used to buy U.S. Series I bonds.
* There is an AMT patch which helps for 2009, but falls back for 2010.
* There is an increased casualty and theft loss limit that helps for 2009.
* Note that a dependent child’s income is taxed when it exceeds $1,900.
* The Tuition and Fees Deduction applies to 2009.
* Unemployment Compensation has $2,400 excluded from taxable income (2009 only).
* Educator’s Expense enhanced for 2009.

Note that not all states accept the IRS changes, so the information and outcome could be different.

For 2010, some old provisions return and some new changes require action now:

* 2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see To convert or not traditional IRA to Roth IRA).
* Certain changes lost for 2010 worth repeating (see What to watch out for in 2010 – investing, taxes and more):
* AMT patch falls back;
* Casualty and theft loss limits fall back;
* Educator and tuition and fees deductions against adjusted gross income are not available;
* Deduction of state and local sales taxes ends;
* Exclusion of $2,400 of unemployment income ends; and
* Exclusion of income from qualified distributions from IRAs to charities ends.
* The estate tax still has not been enacted retroactively, as expected (see Estate Planning – will we have a new tax law in time).

As we said before, tax planning involves a multi-year view to optimize what you end up paying (please see More Strategies – Three Year Planning…., Tax Credits and all Continued, and What to watch out for in 2010 – investing, taxes and more)

Let us know if you have questions or comments. Thanks,

Steven

More Tax Strategies – Three Year Planning for this year-end

Because some tax laws will lapse by their own terms and because new laws will certainly be enacted, the year-end tax planning for 2009 differs from most years: you need to also consider the changes that will occur in 2010 and even 2011.

First, when the Bush tax cuts expire in 2010, the two top tax rates will move up from 33 percent and 35 percent to 36 percent to 39.6 percent. For a couple making $500,000, the added tax will be about $6,000 per year, for a couple making $1 million about $30,000.

Second, the 15% capital gains rate will end. So, do you sell stocks now, perhaps using capital losses from prior years to shelter the gain, in order to increase your basis so that when you later sell, less will be taxed at the higher rate?

Third, IRA distributions may be taxed at higher rates in the future. So, do you take the current law deferral and not distribute in 2009 or instead distribute anyway so that less comes out in future years at higher rates?

Fourth, do you delay major deductions such as planned charitable gifts? The deduction could be worth more in 2011 or you could be in the AMT.

There are some changes the did get enacted for 2009 that help:

The first time home buyer credit of $8,000 is extended for contracts signed by April 30, 2010 and closing by June 30, 2010 (however, there is a phase out of this credit for high income filers).

Also, small business can carry back 2008 or 2009 losses five instead of two years.

All of these issues can lead you wondering what to do. The starting point, whether you do the work or hire someone to do it for you, is to create good working tax projections for 2009, 2010 and 2011. From these, you can see if you are in the AMT or not, if you will have more income taxed at higher rates in the future, etc.

Let us know if you have questions and what help we can supply …..

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven

Consider risks when changing your investment allocation

The article reprinted below raises good issues on risk, asset allocation and rebalancing your investment portfolio.

The author asks us to remember how we all felt a year ago (if you want a good video reminder, try this video: Wall street one year later.

Then, as you think of the risks you took staying invested, he suggests that you need to remember that feeling now, when you consider taking on any more risk, e.g., adding to stocks.

One of his best comments he makes is that you should be rebalancing your portfolio at key points in time.

If you stayed in equities or bought more at the beginning of this year, you actually need to trim back now, because the recent gains mean that you are over-weighted in stocks and need to sell and buy investments that did not do as well to maintain your asset allocation.

Over time, rebalancing can be a technique that helps to get you out of investments at the top, when others want to buy, and into investments at the bottom, when others want to sell. In other words, the stock market gains are more a sign to trim that to add…..

Let me know if you have questions or comments …. Thanks,

Steven

Tax Strategies Now save taxes later – year end planning

Now is the time to begin planning for 2009 taxes – and for 2010 tax strategies.

As with past years, the goal is to pay the least amount for 2009 and 2010 together. To do this, the common wisdom is to push income into 2010 and accelerate deductions into 2009. This is especially true if rates will go up in the future.

However, if you will be in the AMT for either year, or if one year with have especially large deductions or income, then the strategies change.

Also, there are some special considerations for planning this year:

* There are certain benefits only available in 2009 or 2010 such as the conversion to a Roth IRA with no income cap and the first time home buyer credit;
* Tax rates after 2010 are likely to go up as reductions in rates from the Bush tax laws end after 2010;
* You may have capital losses to shelter capital gains so you want to use them well;
* Furthermore, there may be taxes to pay for health care law and the stimulus package;
* Make sure you use your Flex account funds and any frequent flyer miles that will expire; and
* Finally, some features may be extended, such as the $8,000 first time home buyer credit.

Sitting down to review 2009 and 2010 could save you money. Also, the work you do now will help on what you owe for 2009 as well as the tax preparation.

There is a very good article with details on this from Kiplinger’s Tax Newsletter that I can forward to you if you wish – Let me know

Thanks,

Steven

Let us know if you have questions or comments. Thanks,

Steven