Year-End 2009 – page 2

New rules provide tax savings now, benefits later

Whether you think the economy is on the road to recovery or stuck in neutral, one thing is clear: cutting taxes has never been more important. Fortunately, there are special incentives this year to both save taxes and help jump start the economy. Find out why the final months of 2009 may be your best opportunity in years to trim your tax bill and invest for the future.

Look on the home front

It's not too late to lower your 2009 taxes through energy-efficient home upgrades. Installing qualified windows and skylights can provide a tax credit, as can installing exterior doors, roofing, and insulation that meet energy-saving standards. What's more, a tax credit is available for up to 30% of the cost of major energy-savers, such as a qualified solar water heater or geothermal heat pump.

Need a new car? The American Recovery and Reinvestment Act of 2009 provides a deduction for sales taxes paid on new cars, light trucks, motorcycles, and even motor homes. The deduction is limited to the tax on $49,500 of the purchase price. You don't have to itemize to take the deduction, and if you live in a state without sales tax, you can still deduct other fees and taxes associated with the sale.

Invest in your business

The Recovery Act restored the higher Section 179 equipment expensing limit, allowing small businesses to write off as much as $250,000 of new or used equipment purchased this year. In addition, brand new equipment, software, and leasehold improvements can qualify for a 50% first-year bonus depreciation deduction if purchased and placed in service before the end of 2009.

The Recovery Act also helps businesses invest in their most important asset — their employees. Employers can provide employees with a tax-free fringe benefit of up to $230 per month for qualified mass transit and van pooling expenses.

Invest in yourself

Having thoughts about returning to school? Now may be the time. Up to $4,000 of higher education costs for yourself, your spouse, or a dependent can be deducted from taxable income in 2009 if you meet the income limits ($65,000 or less for singles, $130,000 or less for joint filers). If income exceeds these amounts, the deduction drops to a $2,000 limit. Above income of $80,000 for singles and $160,000 for couples, no deduction is allowed.

There's also a revamped Hope Credit for educational expenses. The credit is now named the American Opportunity Tax Credit, and it's been increased to $2,500 a year. What's more, the credit applies to four years of college, not just the first two, and 40% of the credit is refundable. Income limits apply here too.

Help your favorite charity

Recent economic times have probably been hard on your favorite charity, and there are ways for you to help. Last year, Congress extended through 2009 the charitable IRA rollover provision which allows those aged 70½ or older to make tax-free distributions of up to $100,000 direct from an IRA to a qualified charity. Businesses can help charities as well by taking advantage of the newly enhanced deductions for donations of qualified food, books, and computer equipment.

This is also a good time to look through your closets and donate unneeded clothing and other household items to charity. Just be sure to keep your receipts. Recent tax law changes have ratcheted up the recordkeeping required for both cash and noncash charitable deductions.

If you use your vehicle for charitable activities, take note of a recent IRS clarification on what you can deduct. You can deduct either a standard rate of 14¢ a mile, or with reliable written records, you can deduct actual out-of-pocket expenses for your vehicle usage in charitable volunteer work.

Hit the books

Some tax-cutting options remain the same from year to year. Proper recordkeeping is always a winning strategy. Are you keeping track of your business mileage? Is your accounting for home office deductions up to date?

One standard tax planning rule is to defer income to the next year and accelerate deductions into the current year. Cash basis business owners might hold off billing some of their December work until January. Consider stocking up on supplies and paying invoices early. Individuals may want to prepay their real estate taxes, especially now that nonitemizers can also deduct real estate taxes (limited to $500 for singles and $1,000 for joint filers). If you have significant medical expenses, try to consolidate the payment of medical bills into one calendar year to exceed the 7.5% of income threshold.

The general expectation is that tax rates will go higher next year. If you think that will happen, you may want to reverse this strategy and pull income into 2009 and delay deductions until 2010. It's always wise to take a multi-year approach to tax planning.

Another smart move is to check your tax withholding and estimated tax payments. Assumptions you made going into this year may have been dramatically affected by the economy. Also, the "making work pay" credit may have reduced the amount of tax withheld from your paycheck. Those who may end up with too little withheld as a result of this credit include married couples with two incomes, individuals with more than one job, retirees, and social security recipients who also work. Remember, if you pay in too much, you tie up important cash. Pay too little, and you could end up owing a penalty.

If the majority of your income is from a small business, there is an added reason to check your withholding or estimates in 2009. You may be permitted to pay in the lower of 90% of your 2008 or 2009 tax bill and still avoid penalties.

Have a plan

Through economic recessions or expansions, tax planning is one strategy that always makes bottom-line sense. Not every strategy mentioned here is appropriate for everyone, and other options not discussed may be more suitable in your particular situation. For help in identifying and utilizing the tax breaks that fit your circumstances, contact us now.