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2009 Year-End Tax Planning

With the end of the year rapidly approaching, now is the time to consider what you can do to take maximum advantage of current tax law to reduce your overall tax burden. Considering the current economic volatility and future expected rise in tax rates, there are a number of opportunities to consider which may significantly benefit your wealth-preservation efforts. Here are some of the recent tax law changes and a few general year-end strategies for your consideration. For Individuals:

  • Roth IRA Conversions: Starting January 1, 2010, there is no longer an income limitation for converting an IRA to a Roth IRA. Also, for 2010 only, taxpayers have the option of splitting the tax burden associated with the conversion between 2011 and 2012. However, if income tax rates rise in 2011, as many observers expect them to, it might be advantageous to pay the tax at the 2010 rates instead of in later years.
  • First-Time Home Buyer Credit Extended: You've probably already heard about the First-Time Home Buyer Credit which gives a tax credit of $8,000 towards the purchase of your home if you don't already own one. The extension bill (which extended the program through April 30, 2010) also included a provision for some current homeowners to be eligible for a $6,500 credit on the purchase of a new home.
  • Sales Tax Deduction for Auto Purchase: Set to expire at the end of this year is the ability to deduct sales tax paid on the purchase of a new motor vehicle. This deduction is in addition to the state income tax deduction you probably already claim. This is also a deduction for alternative minimum tax (AMT)!
  • Deduct "Madoff" Losses: If you lost money in a Ponzi-like scheme, the IRS has issued taxpayer-favorable rules regarding how to deduct those losses. Specifically, they can be treated as ordinary losses instead of capital losses, and aren't subject to the 10% of AGI limitation associated with most theft losses.
  • Energy-Saving Home Improvements: The 30% credit for installing solar panels and solar water heaters has been extended through 2016, with the maximum credit increasing substantially beginning in 2009. Additionally, the $1,500 lifetime credit for energy-saving upgrades to a principal residence, including windows, doors, skylights, roofs, insulation systems, water heaters and central air conditioners, has been reinstated, and increased, for 2009 and 2010. This credit is can also be used against alternative minimum tax (AMT)!
  • High-Income Tax Relief in 2010: For 2010 only, individuals with adjusted gross income (AGI) over $166,800 will no longer have their itemized deductions or personal exemptions phased out. Note that these changes will not affect the AMT calculations.
  • NOL Carryback Extended and Expanded: The ability to carry back a business net operating loss (NOL) five years instead of the usual two has been extended again for 2009 NOL's, and has been expanded to include all businesses.

For Businesses:

  • NOL Carryback Extended and Expanded: The ability to carry back a business net operating loss (NOL) five years instead of the usual two has been extended again for 2009 NOL's, and has been expanded to include all businesses.
  • Immediate Deduction for Capital Assets: The limit on the amount of tangible business assets (not including land or buildings) eligible for immediate expensing remains at $250,000 through the end of 2009.
  • 50% First-Year Bonus Depreciation: In addition to the above, businesses may take 50% first-year bonus depreciation on "original use" tangible business assets purchased in 2009.
  • Depreciable Lives: The shorter 15-year recovery period for leasehold improvements and qualified restaurant property is effective through the end of 2009.

Year-End Tax Planning Strategies:

  • As mentioned earlier, income tax rates are generally expected to rise over the next few years. While many observers do not expect the rates to change until after 2010, it may actually be tax-efficient to accelerate income and defer deductions this year.
  • Unless Congress acts, after 2010 dividends will be taxed as ordinary income (instead of the capital gains tax rates they get now), and capital gains tax rates are also expected to rise to pre-2003 levels. Please keep that in mind as you analyze your investment holdings.
  • Potential rate changes are also pertinent to owners of closely-held corporations or S-corporations with accumulated earnings and profits. It may be beneficial to pay yourself dividends now while the rates are still low.
  • Consider using year-end bonuses with catch-up withholding to reduce corporate taxable income and to avoid underpayment penalties on insufficient withholdings and estimated payments during the year.
  • Businesses should consider buying new assets before the end of the year in order to take advantage of the additional first-year deductions which are set to expire after 2009.
  • Evaluate retirement plan opportunities, such as a SEP-IRA, 401(k) or defined benefit pension plan, to defer taxes. In many cases, contributions after year-end can still count as current year deductions; however, new 401(k) and profit-sharing plans still need to be set up before year-end. Even if you or your spouse are covered by your employer's plan, you may still be eligible to contribute to a self-funded retirement plan.
  • Bunching certain itemized deductions into a single year may provide a deduction that ordinarily would have been lost. This is especially true for medical expenses and miscellaneous itemized deductions.
  • Consider using up the remainder of your $13,000 annual gift exclusion (per giver, per receiver) before year-end.
  • Donating appreciated stock allows you to deduct the full market value of the stock while avoiding tax on capital gains.
  • If you purchased a home in California in the last few years, you may be able to reduce your property tax bill by disputing your home's assessed value as determined under Prop. 13.
  • If you are over 70 and don't need all of your IRA (or Roth IRA) money to live on, you and your spouse (if you have separate IRA's) can each donate up to $100,000 directly to a charity, tax-free. Note that this option is set to expire after 2009.
  • Net capital losses can offset ordinary income by up to $3,000. Consider realizing enough losses to exceed capital gains by $3,000, then purchasing the same stock no earlier than 31 days after the sale, thereby realizing a $3,000 deduction while preserving your investment portfolio.
  • If you, like many others, realized significant capital losses last year remember that those losses carry forward to offset future gains. If you are in a better position now, remember that you can realize capital gains to the extent of the losses that carried forward from prior years and pay no tax on this year's gains.
  • Paying expenses with a credit card allows you to take a deduction this year while delaying the payment until next year.
  • Depending on your particular situation, you may want to consider deferring a debt-cancellation event until 2010

Estate Tax Planning Strategies:

  • Consider using up the remainder of your $13,000 annual gift exclusion (per giver, per receiver) before year-end.
  • There are a number of techniques available to reduce overall taxes by taking advantage of historically-low market conditions and interest rates. The current market conditions offer unique opportunities to save estate tax in the future.
  • There is talk in Congress of eliminating the practice of discounting the transfer value of minority interests in closely-held businesses. If you hold equity in a closely-held business and were planning on gifting portions of your interest in the business, it may be beneficial to speed up the timeframe of your planned gifting.

The key to successful tax planning is considering the overall impact of various strategies on both the current and subsequent years as you weigh your options. The tax professionals at Ghirardo CPA can help you determine which of these and many other strategies are optimal for your specific situation. Remember to include your investment advisor in any investment-related decision you may make. Please contact our office as soon as possible so that we can begin planning to reduce your taxes.

Now's the Time for Estate Planning!

Now's the Time for Estate Planning Work hard, invest wisely and make prudent, educated decisions. These concepts have never been more important. With the current state of the economy, developing and implementing an estate plan that is right for you should be high on your priority list. Because asset values and interest rates are still at record lows, now is a great time to make estate planning decisions that will allow greater wealth to be passed to heirs.

The Gift Tax and How to Avoid It

The federal gift tax exists for one reason: to prevent taxpayers from avoiding the federal estate tax by giving away their money before they die. So while you can’t avoid estate taxes by giving your wealth away, there are certain estate planning advantages that can be realized through gifting.

Medical or tuition expenses are exempt from gift tax liability and do not count toward the annual exclusion amount. This is important because annual exclusion gifting allows you to transfer funds, gift tax-free, reducing your estate tax. Undervalued stocks are a great example of how to use gifting to your advantage during a recession. By transferring stock that today has a low value, but which you anticipate will recover in the future, you will not only avoid transfer taxes but will avoid paying gains on the stocks themselves.

Personal Loans Can be a Win-Win Option

Over the past several years, personal loans have become an increasingly more popular estate-planning strategy. The IRS sets minimum interest rates for personal loans, far below bank rates and depending on the maturity date. This is advantageous to the lender, as the smaller payments will decrease the amount of money being returned to the estate. When used in conjunction with the annual gift exclusion, gifts of the loan’s principal are made yearly by forgiving the amount due and thus maximizing the transfer of wealth and minimizing the estate tax. Be sure to properly document a personal loan to realize the intended benefits.

Grantor-Retained Annuity Trusts (“GRATs”)

A grantor retained annuity trust (GRAT), is a financial instrument commonly used to make large financial gifts to family members without paying a gift tax. This is advantageous in a down economy because if planned correctly, the appreciating asset can be transferred tax-free. When the GRAT is first set up, a “gift value” of the GRAT is calculated. The gift value is set equal to the initial contribution to the GRAT plus a theoretical interest earned on the principal minus the annuity payments that would be made through the end of the term. Thus at the end of the term, the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.

Charitable Lead Annuity Trust (”CLAT”)

A charitable lead annuity trust (CLAT) is a customized and independently managed trust that enables a donor to give a fixed annual amount to charity for either a specified amount of time or the life of one or more individuals. Once the term has concluded, the trust terminates and its remaining assets are distributed back to the donor or to one or more beneficiaries. CLATs are advantageous in a recession because the asset is kept in the donor’s name, provides income to the charitable organization and allows the beneficiary to keep the asset. The lower interest rates utilized in a CLAT result in a larger gift or estate tax deduction going to the charity and a smaller value for any gift of the remainder interest going to the beneficiary.

Act Now!

Ghirardo CPA’s estate planning consultants understand the importance of ensuring long-term financial security for your family and can help you structure a plan that takes advantage of these estate-planning tools. Click here to read more about our estate planning services.