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As 2009 closes in just a few days, there are some important tax changes that will help you save money and prepare to file your 2009 tax return in the spring. We have summarized many of the major changes in our blog post, “Tax Planning Strategies & Year-End Considerations” in November, and since it has been one of our most popular posts, we’ve reposted it here and encourage you to review this information again before starting the process for your 2009 tax return.

As the end of the year approaches, now is the time to evaluate your business and your personal tax strategies. By taking the time to prepare now, using this checklist, you will be able to develop a clearer picture of what your tax picture will look like while there’s still time to maximize current-year savings.

Retirement Planning

Look to maximize tax-deductible retirement plan contributions. The following table provides the maximum amounts that can be deferred under several popular retirement plan options during 2009.

Fund non-deductible IRA contributions in the amount of $5,000 ($6,000 if over age 50). Establish these as tax-free Roth IRA accounts for qualifying individuals (Qualifying individuals are single taxpayers with AGI less than $105,000 or couples, who file jointly and have AGI less than $166,000). If you exceed this income level, establish these as traditional non-deductible IRA accounts since a new provision in the law will allow you to convert these IRAs to tax-free Roth IRAs in 2010. Contributions to IRAs and Roth IRAs do not have to occur until April 15, 2010.

If you or your spouse operates a separate full or part-time business, consider establishing a separate retirement plan for that business and maximize tax-deductible contributions into it. Contact us to determine if the controlled group rules apply and how we can assist with plan design to ensure maximum benefit and minimal costs.

Alternative Minimum Tax

Don’t forget to consider the burdensome Alternative Minimum Tax. A planning technique that may save you a significant amount under the “regular tax” may be worthless if you fall unexpectedly into the AMT. On February 17, 2009, the American Recovery and Reinvestment Act became law. The bill included a one-year AMT patch which increased the exemption level to an amount slightly above that of 2008. This should alleviate some of the risk of paying the AMT in 2009, but you should still consider the calculation during planning.

Planning for AMT typically focuses on carefully examining normal income tax deductions that become “tax preference items” and no longer deductible under the AMT. These include the following:

• Personal exemptions
• Deductions for state and local income and property tax
• Home equity loans and other mortgage interest not incurred in buying, building or improving your personal residence
• Incentive stock options (which may generate AMT income even when sold at a loss)
• Deductions for unreimbursed business expenses
• Other itemized deductions subject to the two percent of AGI limitation

Homebuyer Tax Credits

As part of the American Recovery and Reinvestment Act of 2009, the First-Time Homebuyer Tax Credit was increased to a maximum of the lesser of 10% of the purchase price of the home or $8,000. Earlier this month, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) which extended and expanded the credit. Scheduled to expire after November 30, 2009, the new law extended the credit to apply for home sales to a first-time homebuyer that close on or before April 30, 2010.

The new law also expanded the credit to qualifying non-first-time homebuyers for home purchases after November 6, 2009. Taxpayers who qualify as “long-time residents of the same principal residence” may now qualify for a modified credit of $6,500. This expansion applies to homebuyers who have owned and used the same residence as their principal residence for five consecutive years during the eight-year period that ends on the purchase date of a new residence.

Income thresholds do apply to these tax credits, and the purchase price of the new residence cannot exceed $800,000. If you have recently purchased a new home or are planning to buy a home in the next several months, it is recommended that you speak with your tax advisor.

Energy-Efficient Vehicles

Consider purchasing a hybrid vehicle for business or personal use. The IRS is constantly updating the list of qualifying vehicles and the amount of the tax credit available to the purchaser of such vehicles. The tax credits range from $1,500 to $3,000. However, this credit is unavailable to taxpayers subject to the Alternative Minimum Tax. In 2009, there is no credit available for purchases of Toyota, Lexus and Honda hybrid vehicles.

If you are considering purchasing a new Audi, BMW, Mercedes, or Volkswagen, there is a $900 to $1,800 federal income tax credit for the purchase of any new qualified lean-burn diesel vehicle. These credits will offset your 2009 federal income tax liability even if you are subject to Alternative Minimum Tax.

If you are considering the option of purchasing a plug-in electric drive motor vehicle instead of a hybrid for business or personal use, if purchased in 2009 you will benefit from a $2,500 credit for the purchase of these vehicles purchased after the first of the year.

New Vehicle Tax Credit

One important note to remember for 2009, all state and local sales tax and excise taxes paid on any new vehicle purchased between February 17, 2009 and December 31, 2009 can be deducted from you federal income tax. The write-off is limited to the amount of taxes on the first $49,500 of the purchase price of the vehicle. However, limitations on income can reduce or completely eliminate this deduction for individuals.

Mortgage Considerations

Convert nondeductible interest on personal loans into fully deductible status through paying off the debt using a home equity line of credit or consolidating loans as part of a home mortgage refinancing. Please remember that interest on home equity lines can only be deducted on the first $100,000 of indebtedness and AMT limits the amounts deducted when funds are used for non-residential purposes.

Accelerate personal tax deductions by prepaying your January home mortgage payment before year-end. You will want to make sure that you make the payment early enough so to allow the mortgage company to process your payment before December 31, 2009.

Charitable Contributions

Watch out for new charitable contribution rules for 2009. You can no longer deduct any cash contribution unless you retain either a bank record that supports the donation (such as a canceled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain a charity-provided statement that meets tax-law standards.

In lieu of cash donations, increase charitable contributions deductions by making gifts of property, such as stocks, bonds, artwork or real estate that have appreciated in value. The full fair-market value of the property is tax-deductible (subject to adjusted gross income limitations) as a charitable contribution if held for at least 12 months, and the gain is not subject to regular or alternative minimum tax.

Consider making non-cash contributions of clothes, household appliances and furniture to your choice of charitable organizations. The new rules concerning charitable contributions require that the contributed property be in good used condition or better to be deductible. Remember to keep accurate records (lists and photos) of the items gifted and request a receipt from the charitable organization. Also, it is advisable to use online tools such as www.itsdeductible.com to provide you with a fair value of the items gifted.

Flexible Spending Accounts

If your company offers a Flexible Spending Account (FSA) program, you must specify before year-end how much of your 2010 salary you wish to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out of pocket medical and dental expenses and qualifying child care costs. However, FSAs are “use-it-or-lose-it” accounts. Therefore, you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Since participants in an FSA are allowed to set aside money on a pre-income tax and pre-FICA tax basis, the participant is able to get a better income tax deduction than claiming an itemized deduction for medical expenses. However, participants are typically limited to the amount that they can contribute to Health FSAs.

If you currently have an FSA for tax year 2009, make sure that you deplete the account by incurring eligible expenses before the deadline for this year. Otherwise, as mentioned earlier, you’ll lose the remaining balance. It’s not hard to drum some things up: over-the-counter drugs, new glasses or contacts, dental work that you’ve been putting off, or prescriptions that can be filled early.

Energy Efficiency Incentives

Initiatives to spur energy saving and alternative fuel use have been instituted in recent laws passed during 2008 were planned to expire in 2009. However, there have been recent changes made in 2009 for deductible improvements to your residence. Credit limits have been increased to 30% from 10% and a combined limited (2009-2010) of $1,500 from a lifetime limit of $500. Also, the credit has been extended through 2010. If you are considering going green and making energy saving renovations to your primary residence, let’s discuss your different options for 2009.

Investment Strategies

Now is a good time to review your investment portfolio to see if there are any losers you should sell. Since 2009 has had many indexes lose a significant amount of their value, you may have investments that are worth less than what you paid for them. This is an opportunity to offset capital gains recognized during the year or to take advantage of the $3,000 limit on deductible net capital losses.

Owners of partnership interests or S Corps should monitor the amount of basis that they have in the entity. If losses exceed the owner’s basis, the loss is generally suspended until the owner has more basis. Also, in cases where cash and property distributions exceed basis, the owner may be subject to capital gain. Please call us for ways to avoid potentially adverse tax effects of having little or no basis.

If you have investment and income producing property, you should consider transferring it to a limited liability company (LLC), which can be established for your family’s benefit. You can gift interests in the LLC to your children, who are 18 or older, to shift the tax burden to a lower tax bracket. A valuation of the LLC units needs to be done by an accredited valuation expert so that gift can be properly reported to the Internal Revenue Service. Also, the valuation may be able to provide some estate tax planning benefits as well.

Bonus Depreciation

The Recovery Act has extended the Section 179 allowance at $250,000 on assets purchased in 2009. However, if the deduction is greater than the individual limit, the excess is lost and cannot be recaptured in future periods. An important note to remember is that in 2010 the section 179 allowance will be reduced to $130,000. In addition, the 50-percent bonus depreciation deduction in addition to the regular depreciation for new qualifying new assets has been extended through 2009.

Other Considerations

• If you own a proprietorship, partnership, or closely held corporation, you may consider the employment of your children. Wages paid by the business are deductible to the business and are taxed at the child’s tax rate. In addition, since your children’s wages are considered earned income. The Kiddie Tax does not apply and this also gives you the opportunity to fund an IRA for your children. Furthermore, this can reduce your business’ payroll tax (Children under the age of 21 are exempt from FUTA), while reducing your self-employment tax.
• The Pension Act of 2006 made permanent the current ultra-favorable income tax treatment of §529 Plans used to finance college education costs that were scheduled to sunset in 2010. This eliminates the concern that funds distributed after 2010, when many §529 beneficiaries will be in college, could be taxed. It may be time to reconsider §529 Plans. If you are uncertain of which college savings plan to use and what benefits they provide, please feel free to contact our office.
• In light of the Fisher case (U.S. Ct. Cl. No. 04-1726T) that concluded in August of 2008, you may be entitled to a refund from prior years. If you received stock from a life insurance company as a result of a demutualization of that company and subsequently sold the stock, you may have reported excessive capital gains. The Fisher case determined that the stock received from the insurance company actually did have basis. Therefore a protective claim for refunds should be filed.
• If you fell victim to the recent Madoff fraud scandal, there is some relief for tax purposes. Investors that lose money in a Ponzi scheme are able to deduct the losses not as capital losses subject to the $3,000 loss limitation for the current tax year. These losses are allowed to be deducted in 2009 for all losses up to 95% of the loss, less the reimbursement you expect to receive.
• Consider the following — $1,000,000 invested in a conservative 60/40 portfolio and withdrawing 4.5% will only provide $3,750 per month for 30 years (and that is before taxes). We would be happy to discuss where you are with your financial planner. If you are in need of a financial planner or are concerned about your current retirement savings, CB&H provides financial planning resources through CB&H Wealth Management. Also, the AICPA provides some great resources at www.360financialliteracy.org.
• If you are currently retired and have been taking distributions from an IRA or have recently celebrated your 70^th birthday and anticipate taking distributions from an IRA, the required minimum distribution (RMD) rules have changed. The Worker, Retiree, and Employer Act of 2008 waives the RMDs generally applicable to defined contribution retirement plans, including IRAs. Consequently, participants and beneficiaries will not be required to take RMDs for tax year 2009.
• Review your disability, disability overhead and life insurance coverage. How much you need varies from individual to individual due to differences in life stages, financial obligations, and income levels. Please contact us if you would like for us to help you in the review of your coverage levels.
• Due to stock market declines and a low interest rate environment, many permanent and cash balance life insurance policies are not performing as designed, which may require additional/higher premiums to be paid or a lapse in coverage. Please contact your life insurance representative to determine whether or not your life insurance policy is performing as intended. If you would like for us to review the policy, we have life insurance professionals available through CB&H Wealth Management.
• Consider utilizing your annual gift exclusion amount to move assets to your children and out of your estate. The annual exclusion for 2009 is $13,000 ($26,000 for joint estates). If you consider involving your grandchildren in the potential estate, then the gift tax savings increase even more. Also, the annual gift tax exclusion is expected to remain the same at $13,000 ($26,000 for joint estates) in 2010.
• With the depressed market values of many assets (such as stocks and real estate) and low interest rates, NOW is a good time to consider certain estate and gift planning strategies for individuals seeking to minimize estate and gift taxes or develop a succession plan for the business. Essentially, if you believe that the current market will continue to rebound in the future, transferring assets now will allow for transferring greater value and appreciation out of your estate.
• Have you updated your Last Will and Testament lately? If you do not have a will or have not updated your will recently, your estate and heirs may be exposed to an unexpected tax liability or your estate may be distributed in a manner that is not of your choosing. Contact Mike Kirkman, Firm Director of Estates and Trusts Services, to review your estate, gift and trust planning strategies.

Prepare for Today and Tomorrow

When it comes to taxes, preparation is the key. As the calendar year draws to a close, be sure to consult with your local CB&H tax professional to ensure that you maximize your potential tax savings and develop strategies that will pay off in 2009 as well as in the future.

For more tax saving strategies, please contact a CB&H Professional in your area.

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