2009 YEAR-END TAX PLANNING OPPORTUNITIES

It is time to consider transactions that can save taxes for this year and next.  Be aware that there is not a one size fits all year-end tax strategy and engaging in tax-motivated transactions, without professional advice, is not recommended.  Review the following and if you believe that one or more of the items may help you, contact us and we will review the applicability of the transaction to your particular situation. 

 Year-end tax planning is especially important if your financial situation will change between this year and next.  Changes include a change in filing status (marriage, divorce. etc.), retirement, job gain or loss, debt cancellation, and starting, closing or selling a business. 

 You will notice the following symbols after some of the strategies.  AMT means that the Alternative Minimum Tax could negate the benefits and $ means that income limitations may prevent you from using this strategy.

EMPLOYEES

 Health flexible spending accounts. Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer's health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. They would not be deductible if you don't itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor beneath medical expense deductions.

If you have set aside funds in your employer's health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don't forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.

To avoid the lose-it-use it rule, you must incur qualifying expenditures by the last day of the plan year (Dec. 31, 2009 in the case of a calendar year plan) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan).

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don't forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs. Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit. Additionally, participating in a dependent care FSA can also save on FICA taxes.

401(k) contributions. Review and make appropriate adjustments to your contributions to you employer's 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.  If your employer offers a Roth option for your 401(k) deferrals, you may want to consider foregoing the immediate tax saving in favor of the long-term advantages of the tax-free distribution rules of a Roth.

Adjustments to withholdings.  If you are facing an underpayment penalty for 2009, you may want to increase your Federal and state withholding for the remainder of the year since withholdings are treated as being paid throughout the year even if they are bunched in the last few paychecks. AMT

Health Savings Account. If you become eligible to make HSA contributions in December of this year, you can make a year’s worth of deductible HSA contributions for 2009.

INVESTORS

Realize losses.  You are allowed to deduct $3,000 of capital losses, in excess of capital gains in each tax year.  Losses over $3,000 can be carried-forward to offset future capital gains. Other than the transaction costs, there is little downside in converting unrealized losses into realized losses in your taxable investment accounts unless you anticipate a near term rise in a particular security.  Remember, you must wait 31 days before repurchasing a security sold at a loss to avoid “Wash Sale” treatment.

IRA to Roth conversion. If you have had a terrible year and your income will not exceed your deductions and exemptions, it would be advisable to convert some of your traditional IRA funds into a Roth IRA.  The conversion is taxable; however, if your other income is minimal, the conversion income will be covered by your deductions and exemptions and therefore tax-free.  Call us before implementing this strategy and be aware that the conversion must be completed before the yearend. $

Partnerships and S corporations.  If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.  You may also consider disposing of a passive activity before yearend to trigger any unused passive losses from the activity.

RETIREES

Minimum Required Distributions.  The requirement that individuals over 70 ½ are required to receive minimum required distributions (MRD) from their retirement accounts has been waived for 2009.  If you are age 70 1/2 or older and took a distribution from a retirement plan or IRA earlier this year, you may be able to avoid tax on the payout by rolling it over into an eligible retirement plan (including an IRA) before Dec. 1, 2009.

Annual Gift Exclusion.  Every individual can give $13,000 per year to another individual without incurring a gift tax liability.  To illustrate, a married couple can give their child $26,000 each year. If the child has a spouse, a $52,000 annual gift is available without a gift tax.  If you have a substantial estate that you want to pass to your child, you may want to consider utilizing your annual gift tax exclusion.

IRA Charitable Gifts. If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings. $

EVERYONE

Energy Saving Improvements.  Make energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, and qualify for a tax credit. (30% of improvement with $1,500 maximum credit) Additional, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.

Auto Purchase.  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

Expiring Write-offs. Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option for assets bought and placed in service this year; the maximum expensing amount will drop to $134,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won't be available next year.

FINAL THOUGHT

Projecting future taxes is almost impossible.  The current deficits together with many expiring tax cuts portend higher taxes in the future.  This is especially true of individuals making more than $250,000 and small businesses.  Constant vigilance and professional assistance can help you minimize the impact of future legislation.