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Lincoln Institute


2009 Year-End Tax Moves

by Doug Keegan
 

As the New Year rapidly approaches, it's time again to think about year-end tax moves. With unemployment above 10% and the economy in recession, Congress has been very busy passing new tax legislation to help spur economic growth. But with record federal deficits and a growing national debt, just how long this tax-friendly environment will be with us remains to be seen. So now may be the time to plan. Here to explain is Doug Keegan of Harris SBSB.

Doug, this certainly has been a volatile year for the markets and for the economy. And as you know, Congress has been busy passing tax legislation in an effort to help. Can you provide our listeners with a tax update and what they can expect as we move into 2010?

Lowman, you're right. This has been a crazy year for the markets and the economy. In fact, it's been a crazy couple of years. We have seen 6 major tax acts since 2008, with names like the Economic Stimulus Act, the Emergency Economic Stabilization Act, the Housing and Economic Recovery Act, and the American Recovery and Reinvestment Act. The intent obviously has been to spur economic growth and give taxpayers a break. But as you know, all this comes with a price tag. So while tax rates are low now and we have all these tax incentives available to us, at some point they will expire. In fact, this week the House is expected to take up the Tax Extenders Act of 2009, extending through 2010 more than forty provisions that are scheduled to expire at the end of this year. So my point is to focus your attention between now and the end of 2010 and discuss a few simple tax moves that might help you save money. But please, before making any tax decision, consult with your qualified tax advisor. My suggestions are not intended to be construed as tax advice. They are simply meant to be informational and to motivate you to seek professional tax advice.

Can you give us a summary of some of the major tax provisions in those acts you just mentioned and how those provisions may affect individual taxpayers? I'm just curious because it seems to me that many of us have no clue just how many tax incentives have been signed into law.

Let's start with President Bush. In his last year in office, he focused on trying to get the housing market back on track. And by the way, President Obama's is continuing that effort. Just a couple weeks ago, he signed into law the Worker, Homeownership and Business Assistance Act, which not only extended the first-time homebuyer tax credit, but expanded it to include current homeowners. And I'll talk about this later on. But getting back to President Bush, he extended the mortgage indebtedness act which allowed taxpayers to exclude from their gross income any forgiveness of mortgage debt, whether it was through a mortgage restructuring or a foreclosure. He also increased conforming loan limits, which allowed homebuyers in high-cost areas to borrow at favorable rates. There were also individual tax credits, like the aforementioned First-Time Homebuyer Tax Credit, as well as incentives for retirees, like the provision that permitted tax-free charitable contributions from IRA accounts.

Now under President Obama, we have seen even more incentives and credits, like the Making Work Pay Credit, the American Opportunity Tax Credit, and an enhanced Child Tax Credit, just to name a few. As you can hear, Lowman, the changes have been significant. But this tax-friendly environment may not be with us for very long. That's why I think now is the time to start planning for not only 2009, but for 2010 as well.

So, in light of all these changes, what should taxpayers be mindful of for 2009?

Making Work Pay Credit
I'll start with the Making Work Pay Credit. Many of you listening probably have seen a slight increase in your paycheck due to the Making Work Pay Credit. The amount is $400 for singles and $800 for couples. Now here's what you need to know. If you don't have taxes withheld because you're self-employed or because withholding is too low for the credit to apply, you can claim the credit on your 2009 tax return. Remember, this is a refundable credit, so if you qualify and you don't receive the entire amount, you can have any additional credit refunded to you at tax time. There are, however potential problems. If you're a college student for example and you're claimed as a dependent, you don't qualify for the credit. This means you'll have to return any credit paid out to you, unless you've made adjustments on your withholding. Additionally, if you're married filing joint and your combined income is above $150,000, you may not qualify for the full credit. Why? Your employer may not be aware of you combined household income. So make sure you adjust your withholding accordingly or you may get caught by surprise next April. This credit is available next year as well.

New Car Deduction
Next, the new car purchase deduction. If you bought a new vehicle, depending on your income, you may get an above-the-line deduction for all state and local sales and excise taxes paid relating to the first $49,500 of the purchase price. This provision went into effect February 17th of this year and expires December 31st. So if you bought a new vehicle prior to February 17th, I'm sorry to inform you, but you're out of luck.

Homebuyer Credit
Let's move on to the First-Time Homebuyer Tax Credit. Not only did Congress just extend the credit, but Congress enhanced it as well. The new rules took effect November 6th. The homebuyer credit is refundable up to $8,000. That means, even if you don't pay any taxes, the government will write you a check for up to $8,000. But remember, if you don't claim it, you won't get it. Now not only was the credit extended through May 1st of next year, the new legislation authorized a similar $6,500 credit for buyers who already own a home. That's right, if you own a home and you're in the market for a new home, a potential $6,500 refundable tax credit awaits you. There is, however, a limit to how much home you can buy and still qualify. That limit for current homeowners is $800,000. There are income limits as well, but those have been expanded so most homeowners should qualify.

Education Credit
And finally, how about some help with college costs. The new American Opportunity Tax Credit is a tax credit for as much as $2,500 as long as you have spent up to $4,000 on college-related costs. Up to 40%, or $1,000, is refundable. It is available this year and next year. On a separate but related topic, for those who own 529 College Savings Plans, this year and next year you can take tax-free distributions from the account to pay for computers and computer technology, including internet access. As you know Lowman, laptops and computers are required for most first-year students. So this is a welcome change. And don't forget, if you make a contribution to any Pennsylvania or non-Pennsylvania 529 College Savings Plan, you can deduct up to $13,000 this year on your Pennsylvania income tax return.

So wrapping up, to better prepare for tax time, what simple tax moves should listeners consider each and every year?

Get Organized
If you're not doing this now, do it going forward. Keep your personal records organized. Why? Your accountant will have a much better understanding of your personal situation and may be able to squeeze out a few extra deductions.

Adjust Your Withholding
If you're under withheld, you don't want to have to come up with tax money in April. So in the last few remaining weeks, try to get some extra taken out of you paycheck so you don't have to write checks come April. On the flip side, however, you don't want to get a big tax refund either. In that case, you're just giving the government an interest-free loan. If you have already paid in 100% of last year's tax and you anticipate no changes, then don't pay in anymore. There are many paycheck withholding calculators online. So play with the numbers. It's worth it.

Monitor Flexible Spending Accounts
A flexible spending account allows you to put pre-tax dollars into an account to be used for qualified expenses tax free. Your program will define what expenses qualify. However, remember to budget carefully what you put in because it is a use it or lose it account.

Maximize Retirement Plan Contributions
For 2009, you can save up to $16,500 or $22,000 if you're over age 50 in a 401(k) type retirement plan. If your company matches what you put in, try to save at least up to the company match. If you just started a job, remember you can still put in an entire year's contribution. It doesn't matter when you started, just that you are eligible. If you don't have an employer plan, take a look at funding a traditional IRA.

Tax losses
Many taxpayers will have long-term capital losses this year. You can deduct up to $3,000 of losses each year against ordinary income with any excess carried forward. But be mindful of the wash sale rule. If you take a tax loss on a stock sale, you can't buy it back within 30 days. So you can't sell a stock on December 31st to get the tax loss and then buy it back on January 1st, you have to wait 30 days.

Capital gains
And finally, for those fortunate enough to have capital gains this year don't forget that capital gains rates are at historic lows. Right now, for taxpayers under the 15% tax bracket, the tax rate on long-term capital gains is 0%. For everyone else, it's 15%. So you may want to look at realizing capital gains this year or next year, as rates on capital gains are slated to go up in 2011.

Doug Keegan is with Harris SBSB and a regular contributor to Lincoln Radio Journal.


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