Individual Tax Planning Strategies - 2009

There is still plenty of time to decrease your 2009 tax bill!

Once New Year’s Day rolls around, your tax liability is set in stone. By taking certain steps now, before 2009 draws to a close, you can reduce the size of your tax bill due when you file your return next year. Especially this year, where there are temporary tax breaks to get the economy moving again, you do not want to overlook any deduction or credit that you can take in 2009 to lower this year's tax bill.
With that in mind, tax reform is on the horizon, and tax increases are definitely expected in 2011 for higher income taxpayers. Depending on the structure of health care reform, higher income taxpayers may also be subject to increased tax rates in 2010. Thus presents the challenge - managing the timing of income and deductions to balance your tax rates between 2009 and 2010 and beyond, with the uncertainty of tax reform.

I Want to Lower my Tax Bill

What should you do if you are trying to lower your tax bill in 2009? Aside from the obvious answer of deferring income and accelerating expenses, here are few items to consider:
  • Charitable Gifting
    • Maximize noncash contributions by making donations of household goods, clothing, etc. to your favorite charitable organizations.
    • Make charitable gifts of appreciated stock and avoid paying tax on the appreciation and deduct the donated stock’s full value.
    • Obtain receipts for all charitable donations – do not overlook the strict substantiation requirements.
  • Maximize The Benefit Of Itemized Deductions
    • Charging year-end charitable contributions to a credit card creates a deduction in 2009 that will not have to be paid until 2010.
    • Accelerating real estate or state income tax payments. Just watch out for Alternative Minimum Tax (AMT), as real estate and state income taxes are not deductible when computing AMT.
    • If your total itemized deductions each year are about equal to your standard deduction, maximize your tax savings by bunching deductions to every other year.
  • Cluster Deductions Subject To Adjusted Gross Income (AGI) Limitation
    • Both miscellaneous itemized deductions (such as unreimbursed employee business expenses) and medical expenses are subject to limitations.
    • To lessen the effects of these limitations, consider bunching these expenses into every other year.
  • Maximize Your Contributions to IRA or 401(k) Plans
    • Maximize your IRA contribution. The contribution limit for 2009 is $5,000, or $6,000 if you are age 50 or older.
      • If you participate in a company-sponsored retirement plan, your IRA contributions may not be deductible, based on your income levels.
    • Maximize your 401(k) contribution. For 2009, the 401(k) limit is $16,500, or $22,000 if you are age 50 or older.
  • Postpone Minimum Distributions from Retirement Accounts
    • Due to the severe decline in value of retirement accounts, (such as IRA’s and 401(k)’s) the required minimum distributions rules have been waived for 2009 for those taxpayers over age 70-1/2.
    • If you have recently received your 2009 required minimum distribution, you have until 60 days from the date you received the distribution to change your mind and repay it back to your retirement account.
  • Other Opportunities
    • Splurge and purchase a new vehicle in 2009. The sales tax on a NEW vehicle purchased between February 17 and December 31, 2009 is deductible for federal income taxes
      • Only applies to the first $49,500 of the purchase price.
      • The deduction phases-out for married couples with AGI over $250,000 and single taxpayers with AGI over $125,000.
    • Increase your home’s energy efficiency and claim up to a $1,500 credit on your federal income tax return for certified expenditures.

My Income is Already too Low

What strategic opportunities can you take advantage of if your income is already very low in 2009, or even a loss situation?

  • Defer Deductions into Next Year
    • Do not pay your real estate taxes in December. Take advantage of paying the real estate taxes in the installment plan specified on your real estate tax bill.
    • Defer charitable contributions until 2010.
  • Take Advantage of 0% Capital Gain Rates
    • For 2009, federal income tax rate on long-term capital gains and qualified dividends is 0% in 10% or 15% regular federal tax brackets.
    • There is a phase-out income limit of $67,900 for married filing joint or $33,950 for single taxpayers.
  • Take Distributions from your IRA With Minimal Tax Consequence
    • For taxpayers over age 59-1/2, distributions can be made without incurring early distribution penalties.
    • The IRA may be a well needed source of funds that will take advantage of your low tax rate situation.
    • For taxpayers under age 59-1/2, consider “Hardship Withdrawals From Retirement Plans” to provide an additional source of funds.
  • Convert your Traditional IRA to a Roth IRA
    • If your 2009 AGI is less than $100,000, you are eligible to convert all or part of your traditional IRA to a Roth IRA.
    • Typically, this is very advantageous for taxpayers that are expecting negative taxable income for 2009, due perhaps to losses generated from business activities.
    • See our article “Should I Convert my IRA to a Roth?”

Especially during 2009, a year of tumultuous change for our economy and our tax laws, we consider a year-end tax checkup an essential service for our clients. If you would like more information on any of the planning strategies, or if you would like to explore how year-end tax planning can be customized to your specific circumstances, please don’t hesitate to contact us.


CIRCULAR 230 DISCLAIMER
To ensure compliance with Treasury Regulations governing written tax advice, please be advised that any tax advice included in this communication, including any attachments, is not intended, and cannot be used, for the purpose of (i) avoiding any federal tax penalty or (ii) promoting, marketing or recommending any transaction or matter to another person.