Year End Tax Planning

Hello everyone, it’s that time of year again, time to look alive.  Sorry this post is so long but its important information and the post break on this system isn't working, Google claims it's working on it.

Yes, I know you are getting ready for the holidays and that alone can be overwhelming, but I want you to remember that you have less than 30 days to make any last minute decisions to positively affect your tax liability for the 2009 tax year. Yep, you’ve got to take action by December 31st for it to matter this year.

Review the items below to see whether you can direct things in your favor financially. Talk with your tax advisor to see if any of these items have a place in your financial position.

If you are one of the many people who
 receive unemployment benefits,
 receive retirement distributions like 401K or IRA distributions,
 receive social security benefits,
 are contractors, or
 are self-employed or has a small business,
and chose to or neglected to have federal income taxes withheld, you may be in for a not so pleasant surprise. You will probably owe taxes to Uncle Sam if your exemption amount wasn’t calculated accurately. Its always a good idea to do the W4 calculation exercise annually to make sure that any changes that you or your family will encounter during the current year is figured in your withholding calculations.

No one wants to have a negative tax liability, so here a few areas that you may want to take a look at to see if they can push you over to the “bright side” of tax refunds.

These items can increase your Schedule A deductions if you itemize:
 Increase your charitable contributions. Your charitable deductions cannot exceed 50% of your adjusted gross income. There is also a reduced limit of 30% and 20% in some cases for certain contributions. If your contributions exceed the limits in any year, you are able to carryover the excess amounts into the following year.
 If you think you may have a tax liability, consider paying January’s mortgage interest and /or real estate property taxes by the 3rd week in December so that they can be recorded as a deduction in 2009 (that way there is no chance that it doesn't get posted until 2010). Ensure that your providers document your payments as you request.
 In order for medical expenses to contribute to your itemized deductions number you have to have expenses in excess of 7 ½ % of your adjusted gross income. To this end a strategy to maximize the use and benefit of your medical dollars would be to try to batch major medical procedures inside of one year if you can. Also, if possible, delay non-urgent procedures to a period when you expect to have a lower adjusted gross income. It may already be too late to make this decision this year, yet you still have an option to put off medical or dental procedures until next year if it will benefit you. Of course it is never beneficial to delay medical or dental procedures for a tax benefit, if so delaying will cause a deterioration in one’s health.

Remember also, that the amount you can deduction is the amount you paid for during the tax year even though the medical procedure may have occurred prior to the tax year in question. Credit card payments count from the date you charged the expense, not the date you paid off the charge, Checks count from the date you mailed the check, so I would get some form of postal receipt – maybe certify the payment.
 You are able to deduct the state, local sales taxes, and excise taxes on new qualified vehicles purchased between Feb 16, 2009 and Jan. 1, 2010 – with a maximum purchase price of $49,500. The deduction phases out for higher-income taxpayers.
 You are also able to deduct your sales tax or your state income taxes on your itemized deduction. For sales tax you can use the actual amount if you kept a record, or the states sales tax table will be used. If you use the calculated table figure, you can also add in the sales tax on big ticket items such as a car (purchased or leased), boat, aircraft, home, or home building materials. It adds up.
Non-itemizers can also benefit:
 If you do not itemize – you can still get an extra $500 ($1000 if married filing jointly) added to your standard deduction for property taxes paid.
 You can take the sales tax itemized deduction on a new qualified vehicle above, even if you do not itemize, the qualifying amount is added to your standard deduction amount.
 More people will now qualify for the Additional Child Tax Credit – as the earned income amounts used to calculate the qualification for this credit have been reduced from $12,550(amount it was expected to rise to in 2009) to $3000, and the amounts you may receive have also been increased.
Earned Income Credit – new this year – the phase-out income amount for taxpayers, married filing jointly is $48,279 for three or more children.
Energy Efficiency Credit– you are able to benefit from 30% of the cost of all qualifying improvements up to a maximum of $1500 credit for improvements placed in service in 2009 and 2010. The maximum of $1500 applies to the total for both years. Improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems (ARRA 2009 – American Recovery and Reinvestment Act of 2009).
 The First Time Home Buyer’s Credit has been modified, expanded and extended until 2010, so you may still be able to benefit (ARRA 2009).
 With the ARRA, for 2009 and 2010, your child now qualifies to take the old Hope Credit – now called the American Opportunity Credit (maximum annual credit of up to $2500 per child), for all four years, instead of only during freshman and sophomore year as you could previously. It is also available for many people who have higher incomes, and you are also eligible even if you have no tax liability. Tuition, related fees, books and other required course materials generally qualify.
 If you are a self-employed person, you should be paying estimated taxes during the year to avoid penalties. Our system is still a pay as you go system, and the IRS expects to get their piece of the pie, just as soon as you make it.
 If you are a self-employed person, your health insurance premium (with some limitation) as a business expense can be claimed as an adjustment reducing your gross income.
 If your child turned 17 this year they no longer qualify for the $1000 Child tax credit so take that into account when estimating your potential tax liability. Since a credit decreases your tax liability dollar for dollar, this can be a nasty surprise when you lose this credit, and a very nasty surprise if you have 17 year old twins.
 If you had debts cancelled this year, e.g. credit card debts, mortgage reductions, repossessions etc. your situation may make some, or all of the amount that was cancelled, taxable income to you. Be sure to talk with your tax advisor about your situation to avoid a nasty surprise next year.
Mileage records for business people & for employees who have unreimbursed expenses are being scrutinized more closely, so it is a good idea to keep your receipts and a log of your mileage with the purpose and people seen. Validation by a 3rd party is also required, so keep records when you take your car in for repair or an oil change where your odometer reading is documented. Of course, always note your odometer reading on January 1st & December 31st of each year.
 While the Recovery Plan put some additional dollars into your paycheck each pay-period – called the Making Work Pay Credit, you could possibly have a smaller refund or even a tax liability if you have not increased your withholding amounts. In addition, you may also have a larger liability if you have multiple jobs, or are married, as you may have received more Recovery money that you should have, and you know how that goes… you got to pay it back.
 If you took a distribution from your 401K or your IRA, and you did not have taxes withheld, you will probably owe quite a bit of taxes. If you took the distribution before reaching age 59 ½ you will likely also owe a 10% penalty. This does not apply to a direct rollover to another 401K plan or IRA. You will still be responsible for the ordinary income taxes on the distribution, but you may reduce or eliminate the 10% penalty using one of these exceptions.
 The first $2400 you receive as unemployment benefits this year will not be taxed (ARRA 2009).
 A 529 (qualified education plan) plan can now be used to pay for colleges expenses that include computers, computer technology, equipment for internet access and related services, if used by the beneficiary of the 529 plan. Software designed for sports, games or hobbies will not qualify unless it’s mainly of an educational nature (ARRA 2009).
 Make sure you exhaust your FSA account. If you don’t use it, you lose it. Take into account your current year’s usage to help you determine your contribution amount for next year.
Traditional IRA Contributions. This is one of the few decisions that you can make after December 31st and still affect your current year’s taxes. You may be able to make a contribution to your traditional IRA and qualify for a tax deduction. Remember you have until April 15th to actually make a 2009 Traditional IRA contribution – but waiting until then means your money isn’t working for you as soon as it could. Making a contribution early or in segments allows you to dollar-cost average. Ensure that your provider is aware which year your contribution should be allocated to.
 If you are over 50, take advantage of the catch-up amounts that are now allowed to fund your retirement plans - an additional $5000 to your 401K or an additional $1000 to your IRA.

Oh yes, I know your financial life is unique, so again, talk with your tax advisor to get more details and to determine if any of these tax strategies will be of benefit to you. The clock’s a ticking.

I’d love hear your questions and comments about the upcoming tax year. Please drop me a line below.  Also, if you would like more information on some items that might impact your business, drop me a comment below also.   Happy, Happy, Holidays to you and yours!!!

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"No matter who you are, making informed decisions about what you do with your money, will help build a more stable financial future for you and your family." Alan Greenspan