As the end of the year approaches, it’s a good time to begin thinking about tax planning. Year-end tax planning could be especially productive this year because timely action can nail down a host of tax breaks that won’t be around next year unless Congress acts to extend them.
The expiring tax provisions for individuals include:
The option to deduct state and local sales and use taxes instead of state income taxes.
The standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles.
The above-the-line deduction for qualified higher education expenses.
Tax-free distributions by those age 70 ½ or older from IRAs for charitable purposes.
For businesses, tax breaks that are available through the end of this year but won’t be around next year, unless Congress acts, include:
50 percent bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $250,000 expensing limitation.
The research tax credit.
The 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.
Finally, without congressional “extender” legislation (which has come at the 11th hour for several years), alternative minimum tax exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won’t be available to offset the AMT.
High-income-earners have other factors to keep in mind when mapping out year-end plans.
Many observers expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less appealing.
Long-term capital gains rates could go up as well, so it might pay for some to take large profits this year instead of a few years down the road. On the other hand, the good news high-income earners have to look forward to next year is that there no longer will be an income based reduction of most itemized deductions, nor will there be a phase out of personal exemptions.
Additionally, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer’s income.
I have compiled a checklist of some actions based on current tax rules that might help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from one or two of them:
Realize losses on stock while substantially preserving your investment position. For example, you can sell the original holding and then buy back the same securities at least 31 days later.
Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. Postponing income is desirable for those taxpayers who anticipate being in a lower tax bracket next year because of changed financial circumstances. Note, however, that in some cases, it might pay to actually accelerate income into 2009. For example, this might be the case where a person’s marginal tax rate is much lower this year than it will be next year.
If you own an interest in a partnership or S corporation, you might need to increase your basis in the entity so you can deduct a loss from it for this year.
Consider using a credit card to prepay expenses that can generate deductions for this year.
Estimate the effect of any year-end planning moves on the alternative minimum tax for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes.
Those facing a penalty for underpayment of federal estimated tax might be able to eliminate or reduce it by increasing their withholding.
Accelerate big ticket purchases into 2009 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction.
If you are planning to buy a car, do so before year-end in order to nail down a deduction for state sales tax and excise tax on the purchase.
Businesses should consider making expenditures that qualify for the business property expensing option, which is up to $250,000 for assets bought and placed in service this year. Businesses also should consider making expenditures that qualify for 50 percent bonus first year depreciation if bought and placed in service this year.
If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.
You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 during 2009 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.
These are just some of the year-end steps that can be taken to save taxes. Now is the time to consult with your tax adviser, before the year ends.
Most of these 2009 tax saving steps cannot be made after Dec. 31.
Michael D. McDevitt is director at BiggsKofford P.C. He can be reached at 579-9090.