Year-End Tax Tips for Individuals and Businesses

The end of another year is coming up fast, and with it, some of the last opportunities to minimize your individual and business 2009 taxable income. The good news: There’s still time to take advantage of some tax-saving strategies before December 31st. Here are some quick ideas to consider.

INDIVIDUALS:
MIX OLD STRATEGIES WITH NEW

Tax planning can be critical at the end of the year. Here are some new ideas to contemplate, along with tried-and-true year-end tax techniques.

Get a new set of wheels. Under this year’s economic stimulus law (the American Recovery and Reinvestment Act of 2009), you can deduct the sales and excise taxes attributable to the first $49,500 of the price of a new vehicle purchased before 2010. However, this deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $125,000 for single filers and $250,000 for joint filers.

Give to charity. If you donate to a qualified charitable organization, you can generally deduct the full contribution amount on your 2009 tax return. Note that donations made by credit card are deductible for this year even if you don’t pay the bill until next year. Be aware you must observe strict recordkeeping requirements for all donations.

Reverse your AMT thinking. The alternative minimum tax (AMT) continues to hit more middle- and upper-income taxpayers. Consult with your tax adviser concerning the complex AMT calculation. If you can’t avoid the AMT, you might go against conventional wisdom and accelerate income into 2009.

Reason: The AMT rate on the income can’t exceed 28 percent – which could be lower than your regular tax rate for 2010.

Lock in a homebuyer credit. New legislation signed in November extended and enhanced the homebuyer credit. For purchases after November 6, 2009 and before May 1, 2010, a long-time homeowner may qualify for a $6,500 credit on a new purchase. (The maximum credit remains $8,000 for first-time homebuyers). Also, the threshold for phasing out the credit is increased to $125,000 of MAGI for single filers ($225,000 for joint filers).

Arrange tax-wise securities sales. Taxes obviously aren’t the only factor to consider when selling securities. But remember you can use capital gains from sales to offset prior losses for the year and vice versa. Any excess loss may offset up to $3,000 of highly-taxed ordinary income. Icing on the cake: The maximum tax rate on long-term capital gains this year is 15 percent. For someone in the regular 10 or 15 percent tax brackets, the usual 5 percent rate is reduced to zero.

Pay next semester’s tuition. Another provision in the economic stimulus law enhances the American Opportunity Tax Credit (formerly called the Hope credit) for higher education expenses. If you pay a child’s college tuition bill in 2009, you may qualify for a maximum credit of $2,500 this year (up from $1,800 for 2008). The credit begins to phase out for MAGI of $80,000 for single filers and $160,000 for joint filers.

Watch out for dividend declarations. For tax purposes, it makes sense to sell mutual fund shares before the fund declares dividends at year-end and to buy shares after that date. This can lower the tax due on dividends you don’t actually receive because of automatic reinvestments. Note: The maximum tax rate on most dividends from domestic companies remains 15 percent in 2010.

Coordinate family matters. Under the “Kiddie Tax,” investment income above $1,900 received by your child may be taxed at your top marginal tax rate. This tax provision generally applies to children under age 19 or age 24 for full-time students. Keep your eye on the $1,900 threshold as year end approaches. It may be possible to reduce your family’s tax liability by shifting funds into tax-deferred or tax-free investment vehicles.

Install energy-saving improvements. The economic stimulus law also enhances the tax benefits for saving energy at home. If you qualify, you can claim a residential energy credit equal to 30 percent of your expenses (up from 10 percent). The previous lifetime $500 dollar cap has been replaced by a $1,500 limit over 2009 and 2010.

BUSINESSES:
SMART MOVES TO TAKE BEFORE DEC. 31

As December 31st approaches, where does your business stand on taxes? By making timely moves, you might be able to put a sizeable dent in your 2009 business tax bill. Here are some strategies to consider.

Unpack new equipment. This year’s economic stimulus law extended the enhanced Section 179 deduction for another year. The maximum deduction in 2009 for business assets is generally $250,000. In addition, you may be able to claim a 50 percent “bonus” depreciation deduction on any excess cost.

Reminder: To qualify for either tax break, you must “place the property in service” before 2010.

Take your best shot at collecting debts. Due to the recession, your business may have had trouble securing payment for goods or services this year. If your business records income on an accrual basis and has totally worthless debts, you can write them off as bad business debts in 2009, thereby reducing your tax liability. Keep detailed records of the efforts – such as phone calls, e-mails and correspondence – that can prove the worthlessness of a debt if the write-off is challenged by the IRS.

Reduce estimated tax payments, if allowed. A self-employed individual is generally required to pay “estimated tax” in quarterly installments. If you qualify under a safe-harbor exception, you can avoid an underpayment penalty.

New rule: The economic stimulus law allows you to base estimated tax payments on 90 percent of your 2008 tax liability (instead of the usual 100 percent) if your AGI for 2008 was less than $500,000 and more than 50 percent of your income was derived from small business activities.

Hire “target” workers. A special jobs credit – called the Work Opportunity Tax Credit – is available to employers who hire workers from certain disadvantaged groups. The credit is generally equal to 40 percent of the first $6,000 of wages for a maximum credit of $2,400 per employee. If eligible workers are hired and start before year-end, the credit can offset 2009 taxes.

Fix up business premises. If you make minor repairs at your business location this year, you can generally deduct the cost of the repairs on your 2009 return. However, “improvements” that prolong the life of the property, enhance its value or adapt it to a different use must be added to basis. For example, replacing a ceiling tile is a repair, but installing a new roof is generally treated as an improvement. Keep repair and improvement expenditures separate.

Take advantage of new NOL rules. Normally, a net operating loss can be carried back just two years before being carried forward for up to 20 years. The economic stimulus law allowed a five-year carryback for NOLs in 2008 for certain small businesses. New legislation enacted in November enables a business, regardless of size, to carry back NOLs in 2008 or 2009 for up to five years.

Caveat: The carryback to the fifth year can only offset 50 percent of taxable income.

Give corporate property to charity. A company can generally deduct donations of property equal to its basis in the property. However, there are several exceptions in the tax law.

Example: If a C corporation gives computer equipment to an elementary or secondary school, it can claim a deduction equal to the basis plus one-half of the ordinary income that would have been realized had the computers been sold (up to twice the amount of basis).

Your tax adviser can help determine if one or more of these year-end techniques is appropriate for your business.

WISDOM FOR TODAY’S ECONOMY

Determine if your business is eligible for the Domestic Production Activities Deduction, which is increasing next year.

The deduction is available to manufacturers of clothing, goods and food, as well as farmers. It can also be claimed by businesses engaged in a variety of other activities including certain real property construction; music recording and film production; electricity, natural gas and water; software development; and engineering and architecture services for construction.

For 2009, the Domestic Production Activities Deduction equals 6 percent of the lesser of:

Taxable income derived from qualified production activities or

Taxable income for the year (determined before the deduction).

For 2010, when the federal deduction is fully phased in, the rate increases to 9 percent.

However, the deduction cannot exceed 50 percent of W-2 wages allocable to domestic production gross receipts. (Therefore, if your business pays minimal wages, the deduction will be very small.)

Year-End Tax Tips for Individuals and Businesses

INDIVIDUALS: MIX OLD STRATEGIES WITH NEW

BUSINESSES: SMART MOVES TO TAKE BEFORE DEC. 31

WISDOM FOR TODAY’S ECONOMY

INDIVIDUALS:
MIX OLD STRATEGIES WITH NEW

BUSINESSES:
SMART MOVES TO TAKE BEFORE DEC. 31