Year-End Tax
Planning & New Law Summary
The 4th
quarter is the ideal time to consider recent tax law
changes and to discuss year-end tax planning strategies. 2009 has seen
the passage of several tax bills, along with the promise of more tax changes
in the near future. Here are some of the highlights.
Time sensitive
items:
Tax break for new
car purchases.
There is a new deduction for state and local sales and excise taxes paid on
the purchase of new cars, light trucks, motor homes and motorcycles after
Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available
regardless of whether you itemize deductions or claim the standard
deduction. The deduction is limited to the tax on up to $49,500 of the
purchase price of an eligible motor vehicle. The deduction phases out for
taxpayers with 2009 modified adjusted gross income (“AGI”) of $125,000
($250,000 if married filing jointly (“MFJ”)). However, if you itemize and
choose the option to deduct state sales taxes in lieu of state income taxes,
you don't get the new deduction.
Rollover window
for mistaken 2009 required minimum distributions (“RMDs”).
A law passed at the end of 2008 suspending the requirement that taxpayers
over age 70 ½ take RMDs from retirement accounts in 2009. Apparently due to
a combination of taxpayers not being aware of the law change, and financial
institutions that automatically sent out the RMDs, a number of taxpayers
received “unnecessary” RMDs during 2009. To help these taxpayers, a new law
allows these unnecessary 2009 RMDs to be rolled back into the retirement
account and escape taxation if the rollover is completed by the later of (1)
60 days following receipt; or (2) November 30, 2009.
Code Section 179
depreciation & 50% bonus first year depreciation.
For businesses, tax breaks that are available through the end of 2009 but
won't be available in 2010 unless Congress acts include 50% bonus first year
depreciation for most new machinery, equipment and software. Additionally,
for qualifying assets bought and placed in service in 2009, Section 179
expensing of up to $250,000 is available; the maximum expensing amount will
drop to $134,000 for assets bought and placed in service in 2010.
Homebuyer tax
credit.
For first-time homebuyers (i.e. no home ownership during 3-year period
before purchase of new home), the credit is $8,000 ($4,000 for a married
individual filing separately (“MFS”)) or 10% of the purchase price,
whichever is less. Only the purchase of a main home qualifies. Vacation
homes and rental properties are not eligible. New law has extended the
credit to apply to a principal residence bought before May 1, 2010. If in
contract prior to May 1st, closing must take place before July 1, 2010. For
more details see the
November 2009 Tax Tip at
www.patinella.com.
The homebuyer credit may now be
claimed by existing homeowners who are “long-time residents.”
For purchases after November 6, 2009, you can claim the homebuyer credit if
you (and, if married, your spouse) maintained the same principal residence
for any 5-consecutive year period during the 8-years ending on the date that
you buy the subsequent principal residence. There's no requirement for your
current home to be sold. The maximum allowable homebuyer credit for
qualifying existing homeowners is $6,500 ($3,250 if MFS), or 10% of the
purchase price of the subsequent principal residence, whichever is less.
The homebuyer
credit is available to higher income taxpayers.
Before the new law, the first-time homebuyer credit phased out for
individual taxpayers with AGI between $75,000 and $95,000 ($150,000 and
$170,000 if MFJ) for the year of purchase.
For purchases after November 6,
2009, the homebuyer credit phases out over much higher AGI levels. For
individuals, the phaseout range is between $125,000 and $145,000 ($225,000
and $245,000 if MFJ).
There's a new home-price limit for
the homebuyer credit.
For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for
a home if its purchase price exceeds $800,000.
Some personal tax
rules set to change in 2010:
Roth IRA Conversions -
Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA
regardless of AGI. Currently, taxpayers with AGI of more than $100,000 are
not eligible for a conversion. For taxpayers converting an IRA in 2010, you
can choose to spread the resulting taxable income over two years with half
taxed in 2011 and the remaining amount in 2012.
Estate Taxes -
Under current law, the federal estate tax is scheduled to be repealed on
January 1, 2010, but only for one year. In 2011, the rules are scheduled to
revert back to what they were in 2001, when the exemption was only $1
million (compared with $3.5 million for 2009). Most tax experts predict
Congress will act before the end of the year to reestablish the estate tax
for 2010 and to institute a federal estate tax exemption that is similar to
today's $3.5 million amount. We'll keep you updated of any changes. Keep in
mind if Congress does not act, and the federal estate tax is repealed for
2010, there will also be no step-up in basis on assets inherited in 2010. It
is important that your estate planning, including wills and trusts, is
reviewed periodically to ensure they reflect current laws.
Some year-end tax
planning strategies to consider:
One opportunity for accelerating
deductions that is often overlooked is to pay your anticipated Arizona tax
liability before year-end, rather than waiting until you file your tax
return in 2010. By paying your state tax liability prior to year-end, you
accelerate into 2009 the itemized deduction for state taxes paid, rather
than having to wait to claim the deduction on your 2010 tax return.
Lock in capital losses. If you are
holding onto stocks or mutual funds in nonqualified accounts (i.e. not a
retirement account, annuity, or other tax deferred account), and have lost
value since original purchase, consider selling before year-end to capture
the capital losses for tax purposes. You are allowed to buy back the same
securities as long as you wait at least 31 days.
Take advantage of the Arizona School
Tax Credits. Qualifying contributions made before December 31, 2009 will
generate a dollar-for-dollar state tax credit as well as a federal itemized
deduction for charitable contributions. Maximum donations to a qualifying
private school are $500 ($1,000 if MFJ). Maximum donations to a
qualifying public school are $200 ($400 if MFJ). You can take
advantage of both the private & public school credits in the same year.
Take advantage of the Arizona
Charitable Tax Credit. Similar to the School Tax Credits, qualifying
contributions made before year-end can generate a state tax credit and a
federal itemized deduction for charitable contributions. The total available
credit is $200 ($400 if MFJ). Contributions made to charities that assist
the Working Poor qualify. A list of these charities appears on the ADOR
website
http://www.azdor.gov under individuals/tax credits/charitable tax
credits. Thankfully the old base year test has been repealed and replaced
solely with the requirement that a taxpayer itemizes deductions to qualify
for the credit.
Other planning areas that we can
assist with throughout the year include (a) Stock Option Planning, (b)
Retirement Planning, (c) Mortgage Planning, (d) College Planning and (e)
Estate Planning.
Email scams.
Please beware that the IRS does not send unsolicited e-mails to taxpayers
about their tax accounts. Anyone who receives an unsolicited e-mail claiming
to come from the IRS should avoid opening any attachments or clicking on any
links. People can forward suspicious e-mails they receive which claim to
come from the IRS to a mailbox set up for this purpose,
phishing@irs.gov.
The tax planning
strategies mentioned in this letter are general suggestions that may not
apply to every taxpayer. Please feel free to contact us to discuss your
specific tax situation. By doing year-end tax planning now, we can take a
proactive approach to reducing your taxes, rather than just being reactive.
