Year End Tax Planning Tips Individuals 2009

Presented by:Kelly A. Chambers, CPA

Stambaugh Ness PC

November 13, 2009

If your company has a retirement plan… contribute to it!

◦ The contributions are not taxable for federal income taxes.

◦ Most companies have a “match”. This “match” is FREE money and is not taxable!

**If you are not participating you are losing out on a great benefit!

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If your company has a Cafeteria (Section 125) plan… contribute to it!

◦ Contributions toward health, specialized insurance, and medical reimbursements are not taxable for federal, social security, Medicare, state, local or federal unemployment

◦ Contributions for child care are not taxable for federal, social security, Medicare or federal unemployment

**If you have to pay for these things anyway, why not do it tax-free!

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If you can Itemize deductions keep track of:

◦ Medical miles, employee business miles, charitable miles◦ Out of pocket medical expenses◦ Any personally paid expenses for your employment like tolls,

parking, uniforms, union dues, subscription fees, tools◦ Job search expenses and moving expenses◦ Sales tax paid on large purchases◦ RE taxes for first and second homes◦ Mortgage insurance (PMI)◦ Mortgage interest◦ Investment expenses◦ Get receipts for donations of food, clothing, furniture, etc.◦ Get receipts for cash donations

All of the above have certain limitations and/or restrictions, but can lead to significant tax deductions.

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An IRA is an Individual Retirement Account

There are two main types of IRA’s1. Traditional IRA2. Roth IRA

You can contribute up to $5,000 to an IRA (Traditional or Roth) in 2009, or up to $6,000 if you are age 50 or older.

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Traditional IRA’s - Defer the tax until you draw the funds out at retirement, then it is taxed at your regular tax rate. You may be entitled to a current year tax deduction for contributions to the IRA.

Roth IRA’s - Does not provide a current year tax deduction, but does provide a TAX-FREE distribution when drawn in retirement.

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There currently are two ways to fund a Traditional IRA:

1. Direct contribution 2. Rollover of funds from an eligible employer

retirement plan; SEP IRAs and SIMPLE IRAs qualify after two years of participation.

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There currently are three ways to fund a Roth IRA:

1. Direct contribution 2. Conversion of all or part of a traditional IRA

to a Roth IRA3. Rollover of funds from an eligible employer

retirement plan; SEP IRAs and SIMPLE IRAs qualify after two years of participation.

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The ability to contribute directly to a Roth IRA depends on your income level as measured by modified adjusted gross income (MAGI).

As of 2010 the $100,000 MAGI limits for Roth Conversion is removed.

You will have to pay income tax on the taxable portion of the Traditional IRA at the time of conversion, but when drawn in retirement it will then be TAX-FREE.

With a 2010 conversion, you can choose to spread the resulting taxable income evenly over 2011 and 2012 and thereby defer the related taxes.

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A credit of up to 30 percent of expenditures for qualifying home improvements and equipment for your personal residence in 2009 and 2010; this credit will expire at the end of 2010 unless Congress extends it.

There are no income limits on the credit, and you can use it to reduce both your regular federal income liability and any alternative minimum tax (AMT).

Maximum combined credit for 2009 and 2010 is limited to $1,500; if you claim an $800 credit this year, you can only claim up to another $700 in 2010.

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This credit covers a wide range of common energy-saving expenditures:

o Exterior doors including storm doorso Exterior windows including skylights and storm windowso Insulation systems designed to reduce heat loss or gaino Metal and asphalt roofs with heat reduction componento High-efficiency central air conditioners*o Furnaces, water heaters, and water boilers that run on natural

gas, propane, or oil*o Electric heat pumps and electric heat pump water heaters*o Circulating fans used in natural gas, propane, oil furnaces*o Biomass fuel stoves used for heating or hot water*

*Items 5 through 9 include costs for site preparation, assembly and installation.

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To claim the credit, you must obtain a manufacturer's certification that the product is eligible for the credit.

After May 31, 2009, Energy Star label windows and skylights don't automatically qualify. You may find the certification on the packaging, or you may have to print it out from the manufacturer's Web site.

Keep this with your tax records.

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$1,500 two-year credit limit

You spend $3,000 in 2009 for some qualifying new

windows and a heat pump water heater. You can claim a $900 credit on your 2009 return ($3,000 x 30%

= $900).

In 2010 you spend a total of $7,000 for a

qualifying central air conditioner and some

qualifying attic insulation.Unfortunately, you can't claim $2,100 credit on your 2010 return

($7,000 x 30% = $2,100). Instead, you can only claim the $600

that remains from the two-year $1,500 limit ($1,500 - $900

already claimed in 2009 = $600 left for 2010).

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Why is this so great?

◦ Because it covers a wide range of common energy-saving expenditures that you might already have done or plan to do anyway.

◦ It is a Tax Credit rather than a deduction. Credits are more valuable because they reduce your federal income tax bill dollar for dollar. In contrast, a deduction only reduces your tax bill by a percentage of a dollar (equal to your marginal tax rate).

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For 2009 through 2016, you can claim another separate federal income tax credit equal to 30 percent of expenditures to buy and install more unusual (and more expensive) energy-saving equipment for your home.

Except for fuel cell equipment, there is no dollar limit on this credit, so big expenditures can translate into big credits, and this can go on year after year through 2016.

There are no income limits on this credit and you can use it to reduce both your regular federal income liability and any AMT.

If your expenditures generate a large credit that exceeds your 2009 tax bill, you can carry the excess credit amount over to next year and beyond.

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Qualifying expenditures for the following items, including costs for site preparation, assembly, installation and related piping and wiring.

◦ Solar water heating equipment for your residence* ◦ Solar electricity generating equipment for your

residence*◦ Wind energy equipment for your residence*◦ Geothermal heat pump equipment for your residence*

*These can include a U.S. vacation home but a residence in a foreign location does not qualify.

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◦ Fuel cell electricity generating equipment for your U.S. principal residence (vacation homes are not eligible); the maximum annual credit for fuel cell equipment is limited to $500 for each .5 kilowatt hour of capacity.

There is no dollar limit on the credit for the first four.

Note: You can't claim this credit for equipment used to heat a swimming pool or hot tub. Special rules apply to expenditures for residential co-ops and condo buildings.

You must obtain a manufacturer's certification on this equipment and keep it with your tax records.

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Purchases of a principal residence by a first-time home buyer after December 31, 2008 and prior to November 30, 2009.

Under these rules, a qualified first-time home buyer may be eligible to receive a tax credit up to $8,000 ($4,000 for Married filing separate) when purchasing a home.

The new provisions eliminated the requirement to repay the IRS after 36 months in the home.

The credit phase-outs that start for taxpayers with AGI in excess of $75,000 ($150,000 for joint filers) continue to apply.

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Recently, the First-Time homebuyer credit was

extended to April 30, 2010.

If a binding contract is entered into prior to May 1,

2010 and settlement occurs before July 1, 2010 the

credit will be treated as not expiring until July 1,

2010.

The new law increases the credit phase-outs to

start for taxpayers with AGI in excess of $125,000

($225,000 for joint filers).

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A "first-time homebuyer" is any individual (and spouse if married) who had no present ownership interest in a qualifying principal residence during the 3-year period ending on the date of purchase of the principal residence for which a first-time homebuyer credit is being claimed.

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Legislation that passed last week added a new provision for Non-First-Time Homebuyers.

It allows up to a $6,500 ($3,250 for Married filing separate) credit for the purchase of a new home to homeowners who have lived in their principal residence for 5 consecutive years during the past 8 years.

The credit phase-outs start for taxpayers with AGI in excess of $125,000 ($225,000 for joint filers).

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Purchasers of new vehicles for 2009 would be allowed an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase.

There are two limits on this new deduction:1. Deductible sales tax cannot exceed the portion of the tax

attributable to the first $49,500 of the purchase price of any one vehicle. (For PA that would be $2,970)

2. Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125,000 ($250,000 for joint returns).

Any newly purchased vehicle, including cars, SUVs, light trucks, motorcycles, first used by the taxpayer that weighs no more than 8,500 gross pounds generally qualifies.

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You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child (including a child with special needs).

Not available for any reimbursed expense.

The maximum adoption credit is $12,150.

In addition to the credit, certain amounts paid by your employer for qualifying adoption expenses may be excludable from your gross income.

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The maximum exclusion from income for benefits under your employer's adoption assistance program is also $12,150.

These amounts are phased out if your modified AGI is between $182,180 and $222,180.

You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

You may be eligible to take an increased credit or exclusion for expenses related to the adoption of a child with special needs.

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Qualifying expenses include reasonable and necessary:◦ Adoption fees◦ Court costs◦ Attorney fees◦ Traveling expenses (including amounts spent for meals and

lodging while away from home)◦ Other expenses directly related to and for which the principal

purpose is the legal adoption of an eligible child*

The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final.

*An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself.

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Up to $2,500 per student

Available for the first four years of post-secondary education

Student required to be enrolled at least half-time

Qualified tuition and related expenses include expenditures for "course materials" such as books, supplies, and equipment needed for a course of study

Cannot claim the credit if you or anyone else claims the Lifetime Learning Credit for the same student in the same year

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Generally, 40% of the credit is a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

Phase out starts if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

For 2009 only, if you claim the credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the credit using the previous rules, but then required to do so for all students for which you claim the credit.

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The credit is equal to 20% of the first $10,000 of out-of-pocket expenses for qualified tuition and related expenses of all eligible family members, up to a maximum of $2,000 in expenses annually.

Same expenses qualify as the Hope Credit; these expenses must be related to a postsecondary education at an eligible educational institution.

Unlike the Hope Scholarship Credit, students are not required to be enrolled at least half-time.

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You cannot claim the credit if you or anyone else claims the Hope credit for the same student in the same year.

Phase out starts if your MAGI is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a lifetime learning credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return).

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A Deduction of up to $4,000 is available to help parents and students pay for post-secondary education.

You do not have to itemize to take the deduction.

You cannot take the deduction if your filing status is married filing separately or you are claimed, or can be claimed, as a dependent on someone else's return.

You cannot claim the deduction if you or anyone else claims the Hope or Lifetime Learning Credit for the same student in the same year.

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You cannot claim a deduction on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.

The same rule applies to expenses you pay with a tax-exempt distribution from a qualified tuition plan (Example 529 Plan), except that you can deduct qualified expenses you pay only with that part of the distribution that is a return of your contribution to the plan.

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Deduction of up to $2,500.

Loan must have been taken out solely to pay qualified education expenses, and cannot be from a related person or made under a qualified employer plan.

Does have income limitations.

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Up to a $1,000 credit per qualifying child

A portion of it may be refundable

A qualifying child is a child who:◦ Is your son, daughter, stepchild, foster child, brother,

sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew)

◦ Was under age 17 at the end of 2009◦ Did not provide over half of his or her own support for

2009◦ Lived with you for more than half of 2009, was a U.S.

citizen, a U.S. national, or a U.S. resident alien ◦ Adopted child is always treated as your own child and

includes a child lawfully placed with you for legal adoption

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If you have earned income and paid someone to care for your child or other qualifying person so you (and your spouse if filing jointly) could work or look for work in 2009.

Who qualifies?◦ A dependent child under 13 years old◦ Your disabled spouse or other dependent unable to care for

themselves

A Maximum credit of up to $1,050 for one dependent and $2,100 for two or more dependents.

Credit is calculated based on income and applicable percentage.

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Questions?

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