SOME TAX PLANNING CONSIDERATIONS FOR 2009

As we pass the mid-year point of 2009, there is time for taxpayers to make some financial decisions that may have a positive impact their income taxes for 2009. 

BASIC ROUTINE STRATEGY

Defer income to a later year and accelerate deductions into the current year.  This is the standard tax planning mechanism and assumes no material changes in your financial picture between years.  But, if you expect to be in a higher tax bracket next year, reverse the strategy.  You want to move income into the low tax bracket years, use deductions in high tax bracket years, and generally postpone paying taxes whenever possible.  

ITEMIZED DEDUCTIONS -SHIFTING AND BUNCHING

The techniques that have been effective for years remain.  Bunching is better.  Bunching of your medical expenses and miscellaneous other deductions such as employment related expenses into the same year whenever possible is the most tax advantageous choice.  This is because a portion of these expenses is not deductible based upon your income level.  If you expect your income to substantially increase next year, these expenses should be bunched into 2009.  If you expect your income to significantly decrease in 2010, the payments would yield a larger tax deduction in 2009, unless your income reaches a level where your itemized deductions become limited.  Make charitable gifts in December to claim in the current year, rather than waiting until next year.  Donate appreciated assets so you can claim a deduction equal to the current fair market value in most cases.

INCOME - TIMING AND SHIFTING

Where possible, shift of income from one year to another where it will be taxed at a lower rate, such as a bonus.  The fact that tax rates are already scheduled to be increased in future years, now encourages taxpayers to not defer income into future years where it automatically will be taxed at higher rates.

SALES OF CAPITAL ASSETS - STOCK, RENTALS, ETC.

It is always most important to let economics control timing rather than letting taxes control economic decisions.  When timing options are not critical to a decision, tax considerations should take precedent.  Capital gains rates will be a maximum of 15% in 2009, but they can be expected to increase in future years. For the year 2009, if a taxpayer’s income is below the upper limit for the 15% tax bracket some or all of the capital gains will be taxed at zero. To qualify for the lower capital gains tax treatment, you must hold assets for over 12 months.  If you have stock sale gains or capital gains dividends, and you have an unsold stock which has a current price below your cost basis, sell the stock before year end to offset some or all of the gains.  This is known as “loss harvesting.”  You can always buy the stock back 31 days later if you are still in love with that loser.

SALE OF YOUR HOME TAX FREE - SELL, SELL, SELL

If you sell your primary home which you owned and lived in for at least two of the last five years, you can exempt the first $250,000 of any profit on the sale, $500,000 if married filing jointly.  If you lived in your primary home less than two years, you may be eligible for a partial or complete exemption of any gain if you moved due to change of employment, or health reasons, or “unforeseen circumstances.” There are special rules that limit the exclusion in cases where the property has been used as a rental or was acquired through a 1031 tax deferred exchange.

It is more tax advantageous to sell your former home rather than retain it as a rental.  You sell the home and pocket the tax-free proceeds.  If you must own residential rentals, you then purchase a rental with some or all of those tax-free proceeds.  If you convert your former home into a rental, any appreciation in its value during the time you occupied it as a residence can become subject to income tax upon a sale.  Save tax money.  Tax wise, sell the old home rather than convert it to a rental.

IRA ACCOUNTS - THE OLD AND THE NEW

If your employer offers a retirement plan, 401(k), SEP, etc., join and participate, and make sure to contribute at least as much as your employer will match.  This is free money to you.  Let’s say your employer will match the first three percent of your contributions to a company retirement plan, you should make sure you make contribute at least three percent to receive this matching bonus.  Using tax deferred retirement accounts such as a deductible IRA or a non-deductible IRA is an excellent tax and financial planning tool.  The Roth IRA is advantageous in many circumstances since the earnings are tax exempt for ever, although the amount contributed is not tax deductible. Contributions to these accounts must be made before you file on April 15.  Each of these retirement vehicles is subject to a separate set of restrictions, so it is not a one size fits all scenario. 

ROTH IRA CONVERSION - TO ROLL OR NOT TO ROLL, THE GREAT CONTROVERSY

Taxpayers with income under $100,000 may be eligible to withdraw the amounts held in IRA accounts and transfer the funds to a Roth IRA.  Income taxes must be paid on the all of the funds withdrawn from a deductible IRA, and on the earnings portion of the funds withdrawn from a non-deductible IRA, but the 10% early withdrawal tax penalty is not imposed on any amounts transferred into a Roth IRA.  The earnings in the Roth IRA are income tax exempt.  Careful thought and planning are needed before making a conversion.

CAUTION - BEWARE

You know and I know that the tax laws are constantly changing, complex, confusing, inequitable and downright unfair.  For this reason, it is important for you to remember that the above information is designed to serve only as an outline of possibilities of areas that may affect a person’s income taxes.  Each taxpayer is different and each case is different.  Before making any financial decision regarding the above issues, it is wise, and often imperative, that you seek appropriate knowledgeable tax advice on your specific situation.  This enables an accurate evaluation of the tax impact of the integration of the intended tax event into your tax circumstances.  We are that knowledgeable tax source to whom we refer.