December is here again. There is no better time to do a little tax planning.
We have prepared the following tax-related tips to assist you in managing your year end income tax planning activities. Our office is available to assist you in any way we can in preparing your 2009 income taxes and/or estate planning documents. In addition to Norm’s direct dial office number, which is 612-879-1804, you may also contact him on his cell phone at 612-720-2716, at home, 952-926-3583, or send him an email at firstname.lastname@example.org. Our partner, Michael Ostrem, is also available to help you. His direct dial office number is 612-879-1818 and his email address is email@example.com. There is still time to complete meaningful tax planning activities before 2009 is just a memory.
Congress was busy tinkering with the tax laws and spending your money again this year. We have summarized some of the major changes below for your reference in preparing for your 2009 tax return.
Individual Taxation. The “kiddie tax” for 2009 taxes a child’s income at his or her parents’ highest marginal tax rate on income greater than $1,900 (2009 indexed amount) until age 19. The unearned investment income (e.g. dividends and interest) of a full-time student between the ages of 19 and 24, and whose earned income does not exceed one-half the amount of his or her support, will be exposed to taxation at his or her parents’ highest tax rate. The kiddie tax does not apply to earned income.
The above-the-line (above the adjusted gross income line on your Form 1040 income tax return) deduction of $4,000 for tuition and related expenses was reinstated by Congress for 2009. This deduction is most beneficial for taxpayers with children in college and whose adjusted gross income is below $80,000 (or $160,000 for joint filers).
The ”first-time” home buyer credit is in place for 2009 and has been extended into 2010.
The educators’ deduction, a deduction for up to $250 of classroom supplies purchased by educators is still available in 2009.
Finally, IRA contribution limits for 2009 remain at $5,000 per taxpayer (plus an additional $1,000 for taxpayers turning age 50 or over during the year as a “catch up” contribution). You may also direct the IRS to deposit all or a part of your tax refund directly into your IRA account.
Required Minimum Distributions. There are no required minimum distributions from IRAs in 2009.
State Sales Tax Deduction. The law allowing taxpayers the option of deducting either state and local sales taxes or state and local income taxes on their federal return was extended through 2009. For our clients in states with low or no income tax (such as Florida, Nevada, Texas and South Dakota), this is a helpful development. Unfortunately, the alternative minimum tax may eliminate any benefit provided by this state sales tax deduction.
Charitable Contributions. Any donations of clothing or household goods that you make to a charity will not be deductible unless the donated items are in “good” or better condition.
Just as in 2008, you cannot deduct any 2009 charitable contributions made in cash or by check (or other monetary gifts, by credit card, for example) unless you can produce a bank record or a receipt, letter, or other written communication from the charitable organization confirming that the gift was made. This strict requirement applies regardless of the amount of the donation. The written proof must be provided at the time of the donation and must include: 1) the name of the charitable organization; 2) the date the contribution was made; and 3) the amount of the contribution.
Congress extended the law that allows owners of IRAs who are 70 1/2 or older to give as much as $100,000 from their IRA or Roth IRA to charitable organizations in 2009 without recognizing any income from the distribution. Such a distribution must be made as a direct rollover from the IRA trustee to the charity.
Review Your Investment Portfolio. Qualifying dividends continue to be taxed at a maximum rate of 15%. The implication of this is clear: dividend income is finally on a level playing field with long term capital gains for most investors. Our advice to all clients is to buy more dividend paying stocks. There are timing conditions on the 15% tax rate on dividend income which must be considered – the stock must have been owned for more than 60 of a 120-day qualifying period to be affected by the new rates (the qualifying period begins 60 days before the ex-dividend date). This lower taxation of dividend income has huge implications for your retirement and investment planning. Consulting with your investment professional will help you maximize your benefit from these changes. One final caveat — dividend income from real estate investment trusts (“REITs”) will not qualify for the 15% tax rate. All this said, the favorable tax treatment of qualified dividends is a likely tax increase target.
Also, it is always good tax planning to take advantage of any capital losses you may have before the end of the year. You may deduct up to $3,000 ($1,500 for married taxpayers filing separately) of capital losses on your federal and state income tax returns. Should you have investment securities with a loss this year, now is a good time to sell them as the losses can be used to offset your capital gains. However, please be aware that you are not allowed to repurchase any investment you sell until the 31st day after the sale. This is a very good opportunity to review your portfolio with your investment advisor.
At the same time, if it is at all possible, it is a good idea to delay taking capital gains until January or later. Similarly, you should delay exercising nonqualified stock options or stock appreciation rights. Of course, be mindful of expiration dates and other factors which may be unique to your own situation.
Finally, note that gold and silver are subject to special treatment under the Internal Revenue Code. Since they are considered collectibles, not capital assets, gains on the sale of gold and silver are taxed at a maximum of 28% when held for more than one year, and at ordinary income tax rates when held for less than one year.
Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) is a “parallel” taxing system. In short, your income tax is calculated according to the regular method and also according to the AMT method. You will pay the higher of the two tax calculations. While the AMT was developed to be an “easy” way to prevent high-income individuals from dodging their tax liabilities, because the threshold amounts have not been updated consistently, every year more taxpayers pay the AMT. If you are in danger of being subjected to the AMT, you probably already know what it is; however, if you have questions in this regard, please consult with us. Congress continues to discuss changes to the AMT exemptions and we will, of course, make any such changes a part of your 2009 tax return. The AMT individual exemption amounts were increased slightly in 2009.
Saving for College. As we have advised in the past, it is greatly beneficial to begin saving for your children’s education as early as possible. In the past, the so-called “529 accounts” were a preferred method of accomplishing this goal because of the beneficial tax consequences; however, the 2003 tax law leveled the playing field for Uniform Transfer to Minors Act (“UTMA”) accounts. Essentially, what happens is that because of the capital gains rate decreases which are discussed above, children, who generally fall into the lowest tax bracket, can sell stocks that have been given to them and retain more of the money. Because 529 accounts cannot hold stock and UTMA accounts can, this makes the UTMA accounts more attractive to many taxpayers for gifting purposes. However, 529 accounts may still have other benefits that outweigh how the current laws benefit UTMA accounts, so all families should consider their own needs before deciding how to proceed. For example, there is a provision that allows a gift to a 529 account of as much as $55,000 without it being subject to gift tax, so long as no other gifts are made in the following five (5) years. Further, under Minnesota law, a transfer to an UTMA account is an irrevocable gift, and the recipient is entitled to the funds at age 21. If you may need the money later, do not make such a transfer. The downside to UTMA accounts is the expansion of the kiddie tax. We can help you navigate these choices with the participation of your investment advisor.
Estate Tax Exemption Amount. For decedents dying in 2009, the estate tax exemption amount is $3,500,000. Stay tuned as the scheduled sunset of this exemption amount is being addressed in congress with no final resolution as we write this. Also, please be advised that, for clients domiciled in Minnesota and a variety of other states, the state estate and inheritance tax schemes start at levels below the federal exemption amounts. For example, the Minnesota exemption amount is $1,000,000, which means that if an estate falls between $1,000,000 and $3,500,000 in Minnesota, there will be no federal estate tax, but there will be some state estate tax owed. We can assist you if you have any questions regarding state estate tax issues.
Pay Your State Income Tax Estimate by December 31. If you do any tax planning at all this month, please pay your state income tax estimate by December 31st. Doing so will ensure deductibility of that state tax on your 2009 federal income tax return if you itemize deductions.
Maximize Your Charitable Contributions. Pay with check, credit card, or appreciated stock by December 31st. Donating stock is a very efficient way to contribute because the deduction is based on the fair market value and you do not pay any capital gains taxes on the appreciation. Remember, the IRS requires documentation of every charitable contribution. For donations of less than $250, a canceled check, credit card statement or receipt from the charitable organization can be used to document the gift. For gifts of $250 or more, you must have a receipt or letter from the charity documenting the gift in order to deduct the contribution on your return. This receipt requirement is an absolute. We must receive your documentation (or copies) to enter your contributions on your 2009 income tax returns.
Postpone Income. Easy to say, not always easy to do: postpone any bonuses if you can. This strategy will not work for bonuses paid by a personal services corporation to an employee-owner or by a Subchapter S corporation to an employee-shareholder. And if income tax rates rise next year, it may be better to “take the money” now.
Pay Deductible Expenses/Bunch Miscellaneous Itemized Deductions. Consider paying any real estate taxes due in 2010 this month. I generally do not recommend paying your January 2010 mortgage payment in December 2009, as this one-time extra interest payment is just that, one time. Also, your mortgage interest statement from your lender will probably be incorrect as a result, and remain incorrect for years to come. Some mortgage lenders have a policy in place to allow you to pay your January payment for the following year up to a cut-off date in December. Contact your mortgage lender for more information about its individual policy. Because miscellaneous itemized deductions are only deductible to the extent that the total exceeds 2% of your adjusted gross income, it may be worthwhile to bunch such expenses. For example, you could pay your 2010 professional dues in December, or prepay subscriptions, union dues or tuition related to job training.
Annual Gifting. You may want to consider taking advantage of the annual gift tax exclusion by December 31. The first $13,000 per person gift each year ($26,000 per donee if your spouse joins in the gift) is excluded from gift tax. Making such gifts may reduce your estate tax obligation.
Capital Investments-Small Business. The Section 179 expense deduction of up to $125,000 for purchases of qualifying property has been extended through 2011. To be eligible for this expense deduction in 2009, the property must be placed in service by December 31st.
Roth Conversions in 2010. Starting in 2010, there will be no income cap barring certain taxpayers from converting their traditional IRAs to Roth IRAs: taxpayers with modified adjusted gross income of more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA. This change applies to all years beyond 2010 – and the income taxes due on the 2010 conversion can be spread over two years. So the 2010 conversion amount may be included as taxable income in 2011 and 2012 – helping to spread out the tax bite. Conversions in subsequent years are included in income during the tax year in which the conversion is completed. Because of this change, you may want to hold off on any conversions planned for December of this year. If you would like to discuss a possible conversion of your Roth in 2010, please contact us.
An Identity Theft Reminder. The IRS does not send unsolicited e-mails about your taxes. If you get an e-mail that appears to be from the IRS, it may be an attempt to steal your private information. Don’t click on any links in the message. Rather, forward the e-mail to firstname.lastname@example.org using the instructions at www.irs.gov.
Enjoy the holiday season!