By Mike Rowan, 11/05/2009
2009 Tax Time is right around the corner, as it’s November already, and the end of 2009 is quickly approaching. However the 2009 tax year offers opportunities that are a little bit outside the norm. There are numerous ways to take advantage of tax breaks that will expire before the start of 2010.
Expiring Individual Tax Breaks and Planning Thoughts for 2009
Some likely changes in our future include an increase in long-term capital gains rates, elimination of the income-based reduction of itemized deductions, and the phase out of personal exemptions. Traditional IRA to Roth IRA conversions will also be allowed without consideration of the owner’s income. Here are some possible tips for you to consider before the end of the year.
Buy a new home – A temporary tax credit for first-time home buyers (or buyers who haven’t owned a principal residence within the past three years) is available until November 30, 2009. For a qualified principal residence purchased between January 1, 2009, and November 30, 2009, the maximum credit equals the lesser of: (1) 10% of the purchase price of a principal residence, (2) $8,000, or (3) $4,000 for those who use married filing separate status.
These Tax Opportunities will be gone after 2009
Option to deduct state sales taxes instead of income taxes
Deduction for state sales tax on purchase of motor vehicle
Above the AGI line deduction for higher education expenses
The $8,000 first-time homebuyer credit (expires by November 30th)
The AMT patch will expire, and exemption amounts will drop
Other Great Financial Planning Thoughts for Year End
Purchase a new car – The stimulus law passed earlier this year created a federal income tax deduction for state and local sales and excise taxes paid on new (not used) vehicles that are purchased, not leased, between February 17, 2009, and December 31, 2009. The write-off is limited to the amount of taxes on the first $49,500 of purchase price. The tax break can be claimed even if you don’t itemize, or if you owe AMT.
Postpone income – If possible, it may be advantageous to postpone the receipt of income until 2010. This will result in a lower adjusted gross income for 2009, and the ability to claim larger deductions, credits and other tax breaks such as IRA and Roth IRA contributions and conversions, child credits, and higher education tax credits, that are phased out at certain income levels. This could be accomplished by arranging with an employer to have a bonus paid in January instead of December.
Prepay expenses – Paying for some expenses by using credit may enable you to accelerate deductions to offset income for 2009. You also may consider purchasing bigger cost items this year in order to make use of the sales tax deduction instead of the state and local income tax deduction.
Make energy improvements – For those who own a home, making energy saving improvements – such as putting in energy saving windows, extra insulation or solar equipment – will provide additional tax credits.
Retirement plans – Self-employed individuals should set up a self-employed retirement plan this year to offset income taxes.
Give to loved ones – Make use of the $13,000 per donee annual gift exclusion by making gifts before year-end. Also note that gifts made directly to the creditor for education or medical purposes do not count against the annual exclusion amount and are not subject to gift taxes.
Charitable IRA Distributions – If you are over age 70½, consider making a charitable gift using distributions directly from your IRA.
As 2009 winds down, you can see that there are several ways to be smart about ushering in 2010 from a financial planning and tax perspective. Many of these deals will expire at the end of the year, but armed with knowledge, you can make them work for you if you make the effort.
