2009 Year-end Tax Planning - Individuals

Dear Client:

Our office knows that 2009 has been a difficult year for many of our clients due to the economic downturn. Although there are signs of recovery, it is expected that a full recovery is still some years away. You may be surprised to learn that the Tax Code could help ease the impact of the recession on your individual tax liability. Our office can help you plan a year-end tax strategy that incorporates many of the traditional "tried and true" strategies as well as some newer ones tied to recent legislation to help minimize your tax liability.

Income shifting. The traditional year-end strategy of income shifting is still valuable this year but there is a twist. Under this strategy, you time your income and deductions so that your taxable income is about even for 2009 and 2010 so your tax bracket remains the same. If you anticipate being in a higher tax bracket for 2010, you may want to accelerate income into 2009 and defer deductions into 2010. Income can be delayed through setting up deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings. The twist is the uncertain future of the individual marginal income tax rates. Currently, the top two rates are 33 percent and 35 percent but they are temporary and will expire after December 31, 2010. The Obama administration has proposed reinstating the 36 percent and 39.6 percent rates for higher-income taxpayers. Congress could allow the higher returns to return after 2010 or make the higher rates retroactive to January 1, 2010. Our office will keep you posted on developments.

AMT. Another planning complication is the alternative minimum tax (AMT). As you know, the AMT was intended to ensure that very wealthy individuals did not evade taxation. Because the AMT was not indexed for inflation, and for other reasons, the AMT today encroaches on many moderate-income taxpayers, especially two-income married couples. Now is an opportune time to compute if you will be subject to the AMT for 2009 or 2010. Our office can explore whether certain deductions should be more evenly divided between 2009 and 2010 and whether certain deductions will qualify, or will not be as valuable, for AMT purposes. Congress is also expected to extend to 2010 a temporary AMT "patch" that insulates many moderate-income taxpayers from the AMT.

Gains and losses. Our office can also help you time the recognition of capital gains and losses to minimize net capital gains tax and maximize deductible capital losses. The process involves determining short term gains, long-term gains, short-term losses, and long-term losses, among other items, and then determining how you might vary the mix before year-end to maximize existing losses and minimize existing gains. Many investors have excess capital losses from 2008 that they may now "carry over" to offset capital gains that would otherwise be taxable. We can help you coordinate your year-end trades with these computations.

Life changes. Marriage, divorce, the birth of a child, death, a change in job or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. If you have had a life change, please contact our office so we can review how that change will impact your federal tax liability. After December 31, 2009, it will be too late to alter most of your bottom-line tax liability for 2009.

First-time homebuyer credit. A taxpayer who is a first-time homebuyer of a principal residence may claim a refundable credit equal to 10 percent of the purchase price of the residence (with a maximum credit of $8,000 ($4,000 for married couples filing separately)). The Worker, Homeownership and Business Assistance Act of 2009, signed into law on November 6, extends the credit for qualified taxpayers purchasing principal residences on or before April 30, 2010. If a taxpayer enters into a binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the new law treats the credit as not expiring until July 1, 2010.

The new law also expands the credit to "long-time homeowners" who are buying replacement property but at a reduced amount of the credit. Individuals who have owned and used the same residence as their principal residence for any five consecutive year period during the eight year period ending on the date of the purchase of a subsequent principal residence may be eligible for a reduced credit of $6,500 ($3,250 for married couples filing separately).

Congress has also made the credit available to more individuals by increasing the modified adjusted gross income (MAGI) phaseouts for the credit. For purchases made after November 6, 2009, the credit begins to phase out for individuals with MAGI between $125,000 and $145,000, and for married couples filing joint returns with MAGI between $225,000 and $245,000.

Making Work Pay Credit. Many individuals are seeing a little more in their paychecks because of the Making Work Pay Credit. However, some taxpayers may be surprised to find that their refunds will be lower than expected next year or that they may owe tax. Our office can check your withholding allowances. You may need to file a new Form W-4 with your employer if you do not want the Making Work Pay Credit to reduce your withholding more than the amount of the credit. For example, our office has been contacted by individuals with more than one job, who have discovered that both employers are reducing withholding for the credit. Married taxpayers whose combined income places them in a higher tax bracket may also want to file a new Form W-4. The credit may also impact your tax liability if you are self-employed or receiving a pension. Please contact our office for details.

Green incentives. When considering home improvements, do not forget a variety of federal tax incentives that can help you save money. One of the more popular tax breaks is the residential energy property credit. The credit is 30 percent of the sum of expenditures for qualified energy efficiency improvements, including windows, furnaces, water heaters, heat pumps, and more, which are placed in service in 2009 and 2010. The credit is limited to $1,500 for 2009 and 2010. The improvement must meet strict energy efficiency standards. If it does not, you cannot claim a credit. This is a common error and it can be a costly one. Our office can review your planned purchase and make sure you will qualify for this valuable incentive.

The Tax Code also rewards taxpayers who purchase "green" vehicles, such as hybrid vehicles and soon to be available plug-in electric drive vehicles. As with home improvements, the vehicle must meet certain energy efficiency standards. The IRS has certified the eligibility of many hybrid vehicles for the alternative vehicle tax credit. Additionally, the alternative motor vehicle credit is now treated as a nonrefundable personal tax credit. This means that it can be used to offset regular tax liability and AMT liability the same as other nonrefundable personal credits to the extent allowed. Do not forget, also, that as a bonus for purchasing any new vehicle by the end of 2009, you may deduct the sales tax that you pay on up to $49,500 of the purchase price, depending on the amount of your adjusted gross income.

Military personnel. Individuals serving in the U.S. armed forces are eligible for a variety of tax incentives. For example, the Worker, Homeownership and Business Assistance Act extends the homebuyer credit for members of the U.S. uniformed services, Foreign Service, and intelligence community on qualified official extended duty outside the U.S. to purchases made before May 1, 2011 (or July 1, 2011 for taxpayers with binding contracts). Additionally, there are special taxpayer-friendly rules for certain distributions from retirement accounts and for the treatment of differential pay. These provisions may be overlooked because they are not as well known as others. If you, a family member or friend is serving in the armed forces, please contact our office for a complete review of all the tax incentives for service personnel.

Disaster losses. The Tax Code provides significant help after a natural disaster, such as a tornado, fire or hurricane. Last year, Congress extended some generous tax incentives to victims of all federally-declared natural disasters that occur before January 1, 2010. These impact how you can claim a casualty loss, expense qualified disaster expenditures, and more. These special tax provisions could help you.

Please contact our office if you have any questions about any of the provisions we discussed in this letter or any other questions about year-end tax planning.

Sincerely yours,

Bryan A. Jackson, CPA            R. Carter Runyan, CPA

2009 Year-end Tax Planning - Small Businesses

Dear Client:

The economic slowdown has made 2009 one of the most challenging years in recent memory for many small businesses. Many employers are struggling to boost profits, retain customers and develop new products in a sluggish market. The Tax Code can provide some relief. Some year-end tax planning strategies may be able to reduce your tax burden as 2009 draws to a close.

Income shifting. Businesses, like individuals, can benefit from the classic strategy of shifting taxable income and accelerating or deferring deductions between 2009 and 2010 by controlling the receipt of income and payment of expenses. Businesses expecting to be in the same or lower tax bracket in 2010 should consider deferring income until next year and accelerating deductible expenses in 2009. Alternatively, if a substantial increase in income is anticipated in 2010 (propelling the business into a higher tax bracket), income should be accelerated in 2010 and deductions deferred until next year.

Net operating losses (NOLs). Due to recent tax law changes to jumpstart the economy, Congress has made year-end loss shifting as lucrative in many instances as income shifting has been in the past. Many small businesses experienced net losses in 2008 and may be preparing themselves for the same bottom line in 2009. The tax law's use of NOL carrybacks, however, can provide a silver lining that allows those losses to be carried back to profitable years and generate an instant tax refund. Congress earlier this year allowed 2008 NOLs from eligible small businesses (those with gross receipts of $15 million or less) to be carried back up to five years to 2003, rather than the usual two years. Now, under the Worker, Homeownership and Business Assistance Act of 2009, signed into law on November 6, Congress extended modified NOL relief to all businesses and to either 2008 or 2009 NOLs, at the election of the taxpayer. Although not as generous in its fifth year carryback provision (only 50-percent of income may be offset), the latest law in effect offers many small businesses the opportunity to double dip: to claim refunds from 2008 NOLs under the earlier relief provision and to claim another round of refunds from 2009 NOLs under the new law that has just passed. In any case, 2009 NOLs are not set in stone until the end of the 2009 tax year. Many businesses that anticipate 2009 tax year losses should be taking steps before end year to accelerate deductions to maximize the size of their 2009 NOLs for a larger carryback refund.

Accounting methods. The accounting method used by a business determines when income must be recognized and expenses are deductible for tax purposes. Cash based businesses can shift income to next year by delaying billing notices for services or products so that payment is not received until 2010. Accrual based businesses can defer income by delaying the shipment of products or provision of services until the 2010 tax year.

Code Sec. 179 expensing. For 2009, a business can immediately deduct up to $250,000 for qualifying equipment purchases, including computers and software. The property must be used more than 50 percent for business. It can be used or new property but in all cases must be your business's first use of that property. To take the deduction for 2009, qualified equipment must be placed in use by December 31, 2009. Keep in mind that any unused Code Sec. 179 amount cannot be carried over into the next year. Please contact our office if you are considering an equipment purchase or other qualifying purchase before year-end. You do not want to miss out on this valuable tax break, which is scheduled to end in 2010.

Bonus depreciation. A related, and also temporary tax break, is 50 percent first-year bonus depreciation of the adjusted basis of qualifying property. The property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. Only new property qualifies. In addition, it must be "placed in service" before January 1, 2010, with some exceptions for certain transportation property.

Research tax credit. Many small businesses mistakenly think the Code Sec. 41 research and experimentation credit is only for large businesses. The credit is complex but it rewards businesses for research activity regardless of size. The credit is generally 20 percent for qualified research and experimentation expenses above a base amount. There is also an alternative simplified credit of 14 percent. Currently, the research and experimentation credit is scheduled to expire after December 31, 2009.

Manufacturing deduction. Another valuable deduction that is often overlooked by small businesses is the Code Sec. 199 deduction for qualifying domestic production activities benefits. For 2009, the deduction equals six percent of the lesser of (1) qualified production activities income for the tax year, or (2) taxable income that does not take the deduction into account for the tax year. The deduction cannot exceed 50 percent of W-2 wages allocable to domestic gross receipts. The deduction applies for both regular and alternative minimum tax (AMT) liability.

Leasehold improvements. Generally, business owners must capitalize the cost of property used in their trade or business and recover the cost over time through annual deductions for depreciation or amortization. In 2008, Congress temporarily reduced the recovery period for qualified leasehold improvement property, qualified retail improvement property and qualified restaurant property to 15 years. If you are considering an improvement to your business, please contact our office.

Charitable contributions. Businesses, like individuals, may deduct contributions to charitable organizations within certain limits. Corporations, but not other business entities, enjoy an enhanced deduction for contributions of computer technology and equipment for educational purposes. This enhanced deduction will expire after December 31, 2009. All businesses regardless of how they are organized can claim an enhanced deduction for donations of food. However, the deduction for donations of food will expire after December 31, 2009.

Business vehicles. Many small businesses depend on vehicles owned or leased either by the company or by the proprietor. The standard mileage rate for business use of vehicles is 55 cents per mile for 2009. The IRS is expected to announce the rate for 2010 before the end of 2009. Because inflation has been low and gas prices relatively stable, it is unlikely that the rate will increase dramatically as it has in past years; it may even go down. Alternatively, you may use the actual cost method. Under that method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees. If you have not compared the two methods recently, please contact our office. Regardless of the method you use, if your vehicle is used for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. There are separate considerations involved in leasing a car for business.

Employee benefits. Establishing employee benefit plans, qualified retirement plans and medical or health reimbursement plans can provide tax savings to employees and your business. Recently, the Obama administration and the IRS unveiled a new initiative encourage small businesses to offer retirement savings plans. The initiatives expand opportunities for automatic enrollment in retirement plans, show how employees can save payments they would receive for unused vacation or other similar leave in their retirement plan, and help employees and employers understand their tax-favored rollover and other savings options. Our office can help you choose or refine a retirement savings plan that best fits your business.

Capital gains taxation. Earlier this year, Congress expanded the 50 percent exclusion from tax for capital gains realized on the sale of qualified small business stock held for more than five years to 75 percent. The exclusion is limited to individual investors. The enhanced exclusion will expire after December 31, 2010. The Obama administration has proposed to increase the exclusion to 100 percent, effective for qualified small business stock issued after February 17, 2009.

New tax laws from Congress. Part of year-end tax planning for this year should be focused on remaining flexible and being ready to capitalize on any new opportunity -or pitfall--that may come your way because of last minute tax law changes. Congress is now considering several changes, including extension of bonus depreciation and enhanced Code Sec. 179 expensing. If any of these provisions pass, or if other, similar proposals move quickly on Capitol Hill, taking prompt action before year end could reward you with significant tax benefits.

Please contact our office for more details about these and any other tax incentives. We can help your small business during this challenging economic time to maximize your tax savings.

Sincerely yours,

Bryan A. Jackson, CPA            R. Carter Runyan, CPA

Roth IRA Conversion Planning

Dear Client:

Prior to 2010, the income limits on both kinds of IRAs have prevented higher income taxpayers like you from making deductible contributions to traditional IRAs, or a contribution to a Roth IRA. Although you could make nondeductible contributions to a traditional IRA, the tax benefits were limited (i.e., no current deduction, the tax on the IRA income is deferred rather than eliminated, and minimum distributions are required).

However, for tax years beginning after December 31, 2009, a conversion from a traditional to a Roth IRA can be made without regard to your income or filing status. Therefore, if you are a married individual filing separately, or have adjusted gross income greater than $100,000, you are no longer precluded from making a Roth IRA conversion. The elimination of the rules related to IRA conversions may provide you with a unique tax planning opportunity.

Although the income limitation on Roth IRA conversions is permanently repealed, there is a special tax treatment available for 2010 conversions only. Conversion income in 2010 is recognized ratably in 2011 and 2012, unless you make an election to recognize all of the income in 2010.

There are several valid reasons why you may want to take advantage of the opportunity to convert to a Roth IRA, other than the obvious tax-free withdrawals and not being subject to required minimum distributions during your lifetime. These include the recent devaluation of your IRA investments, hedging against future tax rate increases, offsetting any current year net operating losses, or estate planning.

The following key factors generally need to be identified and addressed in order to best analyze a Roth IRA conversion:
• Asset mix (i.e., qualified versus nonqualified, liquid versus illiquid)
• Traditional IRA fair market value
• Time horizon
• Current and future cash flow needs
• Current marginal tax rate versus projected future marginal tax rate
• The ability to pay the income tax on a conversion with nonqualified funds
• Estate planning objectives

As you can see, whether a traditional IRA should be converted to a Roth IRA is a complex issue. Please call our office at your earliest convenience to discuss the conversion strategies available to maximize your tax benefits.

Sincerely yours,

Bryan A. Jackson, CPA            R. Carter Runyan, CPA