Ironically, 2009 will be remembered as the year that most of us wanted to forget. The recession has touched almost every household in our country. Many have lost jobs, many have closed down their businesses, and many more are afraid of what will come next. The stock market has marched upwards, but the gains have only reduced prior losses.
In the midst of this maelstrom, before the year comes to an end, there are several steps individuals and businesses can take to benefit from tax saving opportunities. Year-end tax planning is almost a routine annual ritual but for this year, it makes even more sense to be aware of certain tax breaks that will expire by December 31, 2008. The purpose of this article is to address some of the expiring provisions and also discuss some general year end strategies.
- Sales & Use Tax Deduction—May want to buy that automobile that you plan to buy early next year before the year ends.
- Charitable Distributions from IRAs—Tax free if you are aged 70 1/2 or older.
- Above-the-line deduction for higher education expenses
- $8,000 First Time Homebuyer Credit & New $6,500 Credit—This provision expired but got renewed. New law signed on November 6 extends the credit to home purchased before May 1, 2010. Another $6,500 credit is also available for certain qualified taxpayers to buy a second residence.
- Bonus Depreciation—50% bonus on qualified property. This is a huge opportunity for new businesses that start operations in 2008 but do not generate any profits.
- Section 179—The $250,000 limit for qualified property placed in service. Profitable businesses should expedite purchases of qualified assets before December to take advantage.
- NOL Carryback—The 5 year carryback which expired with 2008 returns, has been brought back for another year to include 2009 NOLs. This is a huge opportunity for businesses generating significant operating losses in 2009.
General Year End Planning Tips
As always, there are several other tax planning tips that individuals and businesses should employ before the year comes to an end.
- Maximize contributions to health savings accounts (HSA) and set aside higher amounts to employer sponsored flexible spending accounts (FSA)
- Harvest tax losses from prior years or this year against gains made in the market in 2009. Buyer beware of wash sale rules if you acquire same position within a short time period.
- If eligible, convert your traditional IRA into a Roth, especially if you have significant unrealized losses. Please note that there is no income limitations on converting to Roth in 2010 and this could be a major planning opportunity for some.
- Contrary to recently popular opinion, it is still a good idea to defer maximum in a 401(K) plan. The limit for 2009 is $16,500.
- High income earners with significant itemized deductions should try to postpone paying until 2010, when the limit on itemized deductions is repealed. This is a one-year-only deal and can make significant impact on your tax liability. Tip: It might be a good idea to make charitable contributions for two years in 2010.
- Individuals who have engaged in real estate short sales and who expect 1099’s for the cancellation of debt should try to postpone the short sale closings to allow 1099’s being issued in 2010 instead of 2009.
- Give of $13,000 can be made to an unlimited number of individuals without incurring gift taxes. Tip: Consider gifting depreciated stocks to your children
- Cash basis business taxpayers should try to postpone income until 2010 and accelerate deductions into 2009.
- S Corporations should seriously think about restoring their basis by making contributions to the company before year end to avoid tricky capital gain tax issues or deduct losses.
- Business owners who haven’t made individual estimated payments throughout the year should immediately catch up the difference through higher withholding on their payroll. Tip: This can help avoid significant penalties.
- Pension Plans—If you do not have a retirement plan, it would be good to contemplate starting one.
These and many other strategies can help reduce your tax bill for 2009. It is vital you discuss with your CPA and start making necessary changes before it becomes too late. Proactive and timely planning is the hallmark of tax avoidance. 2009 is especially an important year to miss out on good planning given a host of expiring provisions.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC and a partner at Reliance Wealth & Trust Partners LLC and can be reached at (813) 931-7258 or via email at email@example.com