Time to Talk Taxes

You might not be thinking about taxes with the holidays now in full swing, but my friend and CPA Lee Haight called me the other day to remind me that there are several strategies that I can employ before the end of the year to reduce my tax burden. Lee asked me to pull together my tax documents so that he could check on withholdings and payments, to confirm my tax liability and to consider how I can lower my tax bill. Lee’s ideas were great, so I asked him if he would put together a few thoughts for you, the Alert reader. I think you’ll find the following tax tips very helpful. 

Time to Talk Taxes By R. Lee Haight, CPA Year-end tax planning can be very productive, especially this year, because timely actions will result in tax savings that may not be available next year. For individuals, these actions include: the option to deduct state and local sales-and-use taxes instead of state income taxes; the option to take a standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles; the option to take the above-the-line deduction for qualified higher education expenses; the option to take tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes, and the $8,000 first-time homebuyer credit (for purchases before May 1, 2010).For business owners, you should consider taking a deduction that the law allows for extra first-year depreciation for most new machinery, equipment and software; the ability to expense up to $250,000 on qualified asset purchases; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.

Also remember that alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won’t be available to offset the AMT.

Higher-income taxpayers and investors should consider the possibility that long-term capital gains rates could go up, so it may make sense for some people to take large profits this year. On the other hand, there no longer will be an income-based reduction of most itemized deductions, nor will there be a phase-out of personal exemptions. Also for next year, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer’s income.

Some tax planning ideas for the rest of 2009 should include:

• Increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA), if you have set aside too little for this year. If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2009.
• Realize losses on stock, while preserving your investment position. You can sell the original holding, and then buy back the same securities if you choose to, but remember you must wait at least 31 days to repurchase those securities without penalty.
• Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income.
• If you believe a Roth IRA is better than a traditional IRA, and if you want to remain in the market for the long term, consider converting traditional-IRA money invested in de-valued securities into a Roth IRA, if you are eligible to do so. Such a conversion will increase your adjusted gross income for 2009.
• 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.
• 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.
• Accelerate big ticket purchases into 2009 to assure a deduction for sales taxes on the purchases, if you will claim a state and local general sales tax deduction instead of a state and local income tax deduction. Be careful to consider the effect caused by the AMT.
• If you are planning to buy a car, do so before year-end for the deduction of 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; the maximum expensing amount will drop to $134,000 for assets bought and placed in service next year. This bonus write-off generally won’t be available next 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 in 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 money on your 2009 tax bill.

Lee Haight and his firm Allen, Haight & Monaghan specialize in high-income and high-net-worth taxpayers that need help with tax planning and liability management. Lee can be contacted at:

Allen Haight & Monaghan, LLP
2603 Main Street, Suite 600
Irvine, CA 92614
Phone: 949.852.9433

Email: Allen Haight & Monaghan, LLP
www.ahmcpas.com