December 1, 2009
Dear Client:
As the year nears its close, we wanted to take a moment and alert you to some tax planning strategies as well as update you on the current changes that are being implemented. This year has been a tumultuous year economically, and some recent legislation aimed at easing the burden on taxpayers has been adopted.
FIRST TIME HOMEBUYERS’ CREDIT
This credit has been extended through April 30, 2010 instead of lapsing on November 30, 2009 as originally planned. Binding sales contracts signed by April 30, 2010 must close by June 30, 2010 to qualify for the credit. It’s highly unlikely that Congress will extend the credit any further, according to our tax update services.
The income thresholds have also been raised. For homes purchased after November 6, married couples can claim the full $8,000 credit (assuming the home costs $80,000 or more) if their AGI (adjusted gross income) is $225,000 or less, up from $150,000 previously. The phaseout for singles starts at $125,000.
Even current homeowners can use the tax break now. Those taxpayers who have owned a home for five consecutive years out of the last eight years qualify for a credit of up to $6,500 if they go out and purchase another home after November 6, 2009 and before May 1, 2010. The home must be a principal residence.
Here are the negative changes – Homes costing over $800,000 don’t qualify for either credit if they were purchased after November 6, 2009; no credit is allowed for purchasing a home after November 6, 2009 from your in-laws; dependents cannot claim the credit, nor can taxpayers under age 18; and more documentation is required to claim the credit, as taxpayers must attach a copy of the settlement statement to their tax returns.
NET OPERATING LOSS CARRYBACKS
Large firms can now carry back 2008 or 2009 losses for five years instead of two. The limitation to those firms with gross receipts of $15 million or less has been removed. For large firms, any loss carried back to the fifth year can only offset 50% of that year’s income. Smaller firms get the five year carryback for both years, without the 50% limitation. The election to carry back the losses must be filed by the due date of the 2009 tax returns, plus extensions.
TAX PLANNING OPPORTUNITIES
Since the Bush tax cuts are set to expire, and send the top tax rate back up to 39.6% effective Jan 1, 2011, it makes sense to plan across two years if possible. Let’s take this as a prime example:
The Roth conversion rules are changing in 2010. The tax on 2010 conversions can be deferred and spread out over two years. You can have 50% of the conversion income taxed in 2011 and 50% taxed in 2012. Plus, the income limitations previously in place will be lifted in 2010. If you recall, taxpayers with AGI over $100,000 aren’t currently allowed to convert. However, this changes in 2010. But, if you plan to take advantage of this and spread out the tax into future years, it pays to estimate your total taxable income so that you aren’t slammed into the top bracket and taxed at the maximum rate. It may make sense to pay all the tax up front when you convert. We won’t know this until we make the necessary calculations for you.
The market losses suffered by some taxpayers in 2008, which would be carried forward into 2009 potentially, can afford some planning opportunities. The rebound seen in recent weeks could generate gains for some, and if those gains are offset by losses not utilized in 2008, there could be no tax at all on the gains. Consider this when deciding to sell a security, if your tax situation fits this scenario. We would be happy to analyze this for you.
Also, remember the 0% special rate on long-term gains if you are in the 10% or 15% tax brackets.
As always, donating appreciated stock is a great way to avoid the capital gains tax on the sale, and take advantage of the contribution deduction. Selling the stock and donating the cash defeats the purpose.
The general thought is that Congress will extend the bonus depreciation deduction put in place in 2009 through 2010 as well. However, for 2009 purchases several tax planning opportunities exist for deductions to offset income. If you have questions on how a new asset purchase will impact your 2009 tax liability, please let us know and we can assist in the calculation to determine.
Beginning in 2010, some wage earners may see more taxes withheld from their paychecks. If you recall, the withholding tax tables were updated in the spring to reflect the Making Work Pay Credit, resulting in a little more take home pay. The tables crammed the effects of this credit into the last 9 months of the year. This year’s tax tables will of course spread this credit over the 12 month period, so withholdings will likely increase as the savings of the credit are realized over a longer period of time.
Funding retirement plans and pension plans (for our business clients) is always a great way to reduce your tax liability. Please let us know your plans and we can calculate the tax savings for you.
Tax planning opportunities vary with each taxpayer, and no advice is boiler-plate. So, we continually encourage clients to come in and discuss individual cases with us so we can offer the best advice. Even in cases where businesses are experiencing losses this year, with the advent of the new NOL carryback rules, planning opportunities exist. It’s not too late to come in, and we’d welcome the opportunity to speak with you.
As always, we appreciate you, and look forward to seeing you as tax season approaches. We wish you all a wonderful and exciting holiday season!
Yours truly,
Jonathan I. Godwin, CPA
Current Tax Brackets for 2009
Single Married Filing Jointly
$0-$8,350 - 10% $0-$16,700 - 10%
$8,350-$33,950 - 15% $16,700-$67,900 -15%
$33,950-$82,250 - 25% $67,900-$137,050 - 25%
$82,250-$171,550 - 28% $137,050-$208,850 - 28%
$171,550-$372,950 - 33% $208,850-$372,950 - 33%
$372,950 - - 35% $372,950- - 35%
Married Filing Separately Head of Household
$0-$8,350 - 10% $0-$11,950 - 10%
$8,350-$33,950 - 15% $11,950-$45,500 - 15%
$33,950-$68,525 - 25% $45,500-$117,450 - 25%
$68,525-$104,425 - 28% $117,450-$190,200 - 28%
$104,425-$186,475 - 33% $190,200-$372,950 - 33%
$186,475- - 35% $372,950- - 35%