Yearend tax planning is especially important in 2009.  There are several tax breaks from prior year tax bills and from recent economic stimulus tax bills that will expire by the end of the year.  Furthermore, there is a lot of uncertainty regarding significant tax law changes in the future.  To help you plan for yearend, we have listed below some tax breaks and tax law changes that we think may affect you.  We have also listed some tried-and-true tax planning strategies.

     The following tax breaks are set to expire in 2009.  At this point, Congress cannot be counted on to extend any of them to 2010.

1.      The $8,000 First Time Homebuyer Credit is set to expire November 30, 2009.

2.      There is an additional itemized deduction or additional standard deduction for sales tax on a new car or truck purchased from February 17, 2009 through December 31, 2009.

3.      The additional standard deduction for property taxes expires in 2009.

4.      The itemized deduction for sales taxes, in lieu of state income taxes, expires in 2009.

5.      The $4,000 above-the-line deduction for higher education tuition expires in 2009.

6.      The $250 above-the-line deduction for teachers’ classroom expenses expires in 2009.

7.      The 50% bonus depreciation on business personal property expires in 2009.

8.      The Section 179 deduction of up to $250,000 of business personal property will be decreased after 2009.

9.      There are no required minimum distributions from qualified retirement plans in 2009.

10.  Distributions from traditional or Roth IRAs to charities are excluded from gross income and are not taken into account for charitable deduction limits in 2009.

11.  Unemployment benefits up to $2,400 may be excluded from income in 2009.

     There are some tax breaks from recent stimulus tax bills that are available for 2009 and 2010:

1.       The Hope tuition credit has been expanded.  The maximum credit is up from $1,500 to $2,500.  It is available for the first four years of college, rather than the first two.  Finally, qualifying expenses now include books, not just tuition and fees.

2.      The credit for qualified energy efficient home improvements, which was not available in 2008, has been reinstated and expanded.  The maximum credit is the lesser of $1,500 or 30% of qualifying costs related to a principal residence.  Qualifying costs include insulation, exterior doors and windows, metal roofs, and certain energy efficient equipment.  Such products must generally be certified as qualified by the manufacturer.

3.      The caps have been removed from the 30% credit for certain qualified residential solar, geothermal, wind energy and fuel cell property.

4.       The Work Opportunity Credit of up to $2,400 for each qualified employee has been     expanded to include two new targeted groups:  unemployed veterans and disconnected youth.

    Here are some tax planning strategies to carefully consider before yearend:

1.      Contribute highly appreciated stock or other capital assets rather than cash to charities.  A charitable deduction may be taken for the fair market value of the asset and capital gains tax is avoided.

2.      Defer the gain on real estate by exchanging for like-kind property.

3.      Maximize your itemized deductions by bunching expenditures into the tax year that offers the greatest tax benefit.

4.      Accelerate expenditures to 2009 for tax deductible items, especially those expiring in 2009, and defer income until 2010. 

5.      Take steps to balance gains with losses.  Different rules apply to different gains and losses.  Take care to match the different types – ordinary, passive, at-risk, capital, casualty, and gambling.

6.      Maximize qualified retirement plan contributions.

You should also note that in 2010, traditional IRAs may be converted to Roth IRAs without the long-time $100,000 maximum income restriction.

There are some new credits for qualified electric vehicles which even apply to certain utility and recreational vehicles.

     We hope the above information is helpful to you.  If you would like to discuss your tax planning strategies, please contact us.

Eaton, Babb & Smith