Year-End Tax Planning – It’s Not Too Late
by Rich Barlett, CPA
Have you considered ways to reduce your tax burden in 2009? There’s still time before year-end to take advantage of some tax breaks that may not be around in 2010. Even if Congress decides to extend some of them at the eleventh hour, as lawmakers sometimes do, it is better to take action now than to wait for something that may never happen.
For businesses, tax breaks expected to end in 2009 include the 50 percent bonus first-year depreciation for most new machinery, equipment and software; an unusually high $250,000 expensing limitation; the research tax credit; the five-year write-off for most farm equipment; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
You should also be aware that the alternative minimum tax (ATM) exemption amounts are due to drop significantly next year.
Making Sense of Uncertainty
The traditional way of thinking has been to postpone income and accelerate deductions before year-end. But because the current tax rates are historically low, it might be wise to recognize income this year and push back deductions to 2010. Many forecasters expect top tax rates on ordinary income to increase after this year.
It is also possible that the nation’s health care reform will mean higher taxes for some segments of the population. While rosy scenarios call for revenue-neutral reform, if it doesn’t pay for itself, someone will need to foot the bill. Because President Obama has said he doesn’t want the government to incur additional debt to achieve healthcare reform, higher taxes might be in store.
High-income earners may therefore want to reconsider long-term deferral of their income. They may also want to take large profits before year-end in anticipation of long-term capital gains rates rising in 2010.
Favorable Changes in 2010
Despite the uncertainty of an economy in flux, a bright spot on the horizon concerns individual retirement accounts. Next year traditional IRAs may be converted to Roth IRAs regardless of an individual’s income. You cannot deduct contributions to a Roth IRA, but qualified distributions are tax-free. You can also continue to make contributions to your Roth IRA after you reach age 70-1/2 and you can leave amounts there as long as you live.
As mentioned earlier, Congress may yet extend some 2009 tax breaks in 2010. They already passed new legislation, signed into law on Nov. 6, called the Worker, Homeownership and Business Assistance Act of 2009. This law extends and expands the $8,000 first-time homebuyer credit. The deadline to enter into a contract to purchase a principal residence is now extended to April 30, 2010. The closing must occur on or before June 30, 2010.
The law also benefits long-time homeowners and those with higher incomes. Homeowners who have lived in the same principal residence for any five-consecutive-year period during the eight-year period ending on the date the replacement home is purchased, can claim a credit of up to $6,500 (up to $3,260 for a married individual filing separately).
Higher earners can also now qualify for the homebuyer credit. The credit phases out for individual taxpayers with a modified adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase. For purchases after Nov. 6, 2009, the credit cannot be claimed if the house’s sale price exceeds $800,000.
More Tax-Saving Strategies
Some additional ways to save before the end of 2009:
- Until we know more about future tax rates, most taxpayers will benefit by deferring income until next year and increasing deductions before year-end.
- Use a credit card to prepay expenses and generate deductions for this year. It doesn’t matter if the bill isn’t paid until the new year.
- Pay fourth-quarter state and local estimated taxes before year-end rather than waiting until the January 15 due date. That way you can deduct them on this year’s federal tax return.
- If you are planning to make a big purchase for your business soon, do it in 2009. Most businesses that purchase fixed assets in 2009 will most likely be able to deduct 100% of those costs thanks to the $250,000 expensing limitation.
- If you are planning to buy a car, do so before year-end to claim a deduction for state sales tax and excise tax on the purchase.
- Consider extending your subscriptions to professional journals, paying professional dues, and enrolling and paying for job-related courses to consolidate 2009 miscellaneous itemized deductions, subject to the 2 percent-of-AGI floor.
- Depending on individual circumstances, many additional steps can be taken to save taxes in 2009. It will also be wise to stay alert for any new legislation before year-end that will affect your tax situation in a positive or negative direction.
Rich Barlett, CPA, is a partner with Lewis Barlett Klees, PC, one of central PA’s leading accounting and business consulting firms, with offices in Bloomsburg, Lewisburg and Milton. Barlett manages the Business Services Group. The firm offers auditing, accounting, tax and management advisory services to government, not-for-profit agencies and private businesses, in addition to tax preparation for individuals. Free tax and business tips are available at LewisBarlettKlees.com.
