Year-End Tax Planning 2009
As the end of the year approaches, here is some tax planning information to consider. Remember, this information is generic in nature and may not apply to your situation.
RETIREMENT PLANNING
A taxpayer may contribute to his or her IRA or Roth IRA for 2009 as long as you do it by April 15, 2010. If your income is too high to make a contribution to your IRA or Roth IRA, you may contribute to a non-deductible IRA. Your contribution may be as much as $5,000 plus an additional $1,000 if you're over 50 years of age. If you participate in a retirement plan at work, limits and/or phase-outs apply to any contributions.
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Saver's Credit – if you contribute to your retirement plan at work (e.g. 401k or 403b, 457, SEP IRA, SIMPLE) or a traditional IRA and your income is lower than the income thresholds (less than $27,750 to less than $55,500 depending upon your filing status), you qualify for the Saver's Credit. You must be at least 18 years of age, not a full-time student, and not claimed as a dependent on someone else's tax return. Depending on your income, the tax credit is from 10% of your contribution to as high as 50% of your contribution.
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The required minimum distribution (RMD) from IRAs & employer-provided qualified retirement plans that are defined contribution plans (including 401k plans) is eliminated for calendar year 2009. The next RMD is for calendar year 2010. This relief applies to lifetime distributions to employees, IRA owners and after-death distributions to beneficiaries. Relief may also be available for those who already received an RMD for 2009.
TAX CREDITS
Many taxpayers who purchase a home in 2009 will qualify for an $8,000 federal tax credit. The First-Time Homebuyer Credit is a major tax provision in the American Recovery and Reinvestment Act of 2009. But time is running out to qualify for this credit.
To be considered a first-time homebuyer, you – and your spouse if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase. To qualify for the credit, the completed purchase must occur before December 1, 2009. The credit is either 10 percent of the purchase price of the home or $8,000, whichever is less. The credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000 or $150,000 for joint filers.
The credit is fully refundable. Unlike the 2008 1st time homeowner rules, this credit is NOT a 15 year interest-free loan from Uncle Sam and never has to be paid back as long as the home remains your personal residence for 36 months after the purchase date. A new homebuyer without taxable income can qualify for the credit and may file for the sole purpose of claiming the refund.
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The Residential Energy Credit was brought back and upgraded for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum tax credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to energy efficient improvements such as insulation, exterior windows as well as heating and air conditioning systems.
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Many parents and college students will find yet another provision of the Recovery Act very appealing. The American Opportunity Tax Credit expands and renames the existing Hope Credit for tax years 2009 and 2010. The new credit can be claimed for qualified higher education expenses paid for an eligible student.
Unlike the Hope credit, which was only available for qualified tuition and fees for just the first two years college, the AOTC includes related expenses such as books and other required course materials. Additionally, the credit can be claimed for those qualified expenses paid for any of the first four years of post-secondary education.
The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000 per student each year. The maximum $2,500 credit is possible for a taxpayer who pays $4,000 or more in qualifying expenses. The credit is available to taxpayers who make less than $80,000 or $160,000 for married couples. Phase-outs kick in for taxpayers with incomes above these levels. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 cash back for each eligible student.
OTHER PLANNING REMINDERS
In 2008, the lower tax rate of 15% on long-term capital gains and qualified dividends was extended through 2010. Remember as well that a capital gains rate for some investors dropped to zero. The zero-percent rate also applies through 2010 and is limited to taxpayers in the 10% to 15% tax brackets. If you are lucky enough to still have long-term gains, consider taking those gains in 2009 as opposed to a later year. Expect future capital gains rates to increase.
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Cash charitable contributions require a receipt from the charity. This means that if you attend church on Sunday and put $10.00 in the collection plate, you cannot take a deduction without a receipt from your church. If you pay by check, your canceled check is your receipt unless the total of your contributions is $250 or more then you also need a receipt from the charity. Best practice? Always get a receipt!
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Rick Janowski has been a tax professional for more than 25 years and is the owner of AmeriTax Tax & Financial Services in West Allis. He can be reached at 414-259-9040 or by email at ameritaxtips@wi.twcbc.com
