Investor Education – Tax Information
2009 Year-End Tax Planning Considerations
Here are some things to consider as you weigh potential moves between now and the end of the year.
Year-end moves and the AMT
Deferring income to next year--for example, by delaying a year-end bonus--is a common year-end tax planning strategy. Similarly, individuals often look for ways to accelerate deductions into the current year--for example, by paying deductible expenses in December rather than in January. If you're subject to the alternative minimum tax (AMT), however, these traditional year-end maneuvers may actually hurt you.
Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end tax planning. For example, if you're subject to the AMT in 2009, prepaying 2010 state and local taxes won't help your 2009 tax situation, but could hurt your 2010 bottom line.
Legislation earlier this year forestalled a dramatic spike in the number of individuals subject to AMT by temporarily increasing AMT exemption amounts for 2009. If you're one of the millions of individuals still expected to be subject to AMT in 2009, however, that won't be much comfort. Taking the time to determine whether or not you may be subject to AMT before you make any year-end moves can save you from making a costly mistake. If you're not sure, talk to a tax professional.
RMDs suspended for 2009
When you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. Individuals are required to take these distributions each year, withdrawing the minimum amount by the end of the year (individuals who turn 70½ during the year generally get until April 1 of the following year to take their first RMD).
Legislation in late 2008, however, suspended RMDs for 2009. (This suspension of RMDs also applies to amounts required to be paid to beneficiaries after an IRA owner's or plan participant's death.) This presents an opportunity for those normally required to take RMDs to postpone the receipt of taxable income.
2010 Roth conversion rules
It's also worth looking ahead to the special rules that will apply in 2010 when a traditional IRA is converted to a Roth IRA. Current limitations based on income and filing status that prevent many individuals from converting to a Roth IRA will be eliminated. Additionally, if you convert in 2010, half the income that results from the conversion can be reported on your 2011 federal income tax return and half on your 2012 return.
This 2010 conversion opportunity might influence your 2009 year-end planning. For example, if you're currently working but aren't eligible to contribute to a Roth IRA, you might consider making nondeductible contributions to a traditional IRA for 2009 in anticipation of making a conversion in 2010.
Also worth noting
- A tax credit up to $8,000 is available in 2009 for qualified first-time homebuyers (only home purchases before December 1, 2009, qualify).
- The first $2,400 of unemployment compensation received in 2009 is excluded from income for federal income tax purposes.
- If you itemize deductions, 2009 is the last year you'll have the option to deduct state and local sales tax in lieu of state and local income taxes.
- The temporary deduction for sales and excise tax relating to the purchase of a qualified new automobile, light truck, or motorcycle applies to vehicles purchased through December 31, 2009.
- The above-the-line deduction for qualified tuition and related expenses expires at the end of 2009.
- The provision allowing small businesses to take an additional 50% in first-year depreciation expires at the end of 2009; the expanded $250,000 Section 179 expensing limit for small businesses also expires at the end of 2009.
AMT “triggers” You’re more likely to be subject to the AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes and miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren’t used to buy, build, or improve your home, and the exercise of incentive stock options.
Stay informed
It's always possible that legislation late in the year could extend some of the provisions above, or add new wrinkles--so stay informed. Talk with your financial professional to evaluate your situation and determine which year-end moves make the most sense for you.
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.