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Year End Tax Planning Strategies

Individual Income Tax Checklist

Financial / Investment Planning Questionnaire

Additional First Year Depreciation

Expense the Cost of $250,000 of Business Property. The section 179 deduction allows business owners to deduct up to $250,000 of the cost of qualifying depreciable property placed in service in 2009. Property eligible for the immediate tax write-off can be new or used and includes “off-the-shelf” computer software. (Even property purchased on the last day of the year qualifies.) However, the allowable deduction cannot exceed your business’s net income and is reduced dollar-for-dollar to the extent the amount of qualifying property placed in service during the year exceeds $800,000. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property, you might consider doing so before year-end to maximize your 2009 deductions.

The American Jobs Creation Act of 2004 limits the section 179 deduction to $25,000 for heavy SUV’s (over 6,000 pounds gross vehicle weight).

50% Bonus Depreciation
The Economic Stimulus Act of 2008 raised the first-year bonus depreciation rate on new business assets to 50%. Under the bonus deprecation rules, 50% of the cost of qualifying property is deductible in the year the property is purchased and placed in service. This is in addition to the regular depreciation allowed for the rest of the cost. For example, a new $150,000 machine placed in service in December 2009 may be eligible for a first-year bonus and regular depreciation deduction equal to $85,718, which is more than 55% of the cost.

Only new property is eligible for bonus depreciation. Unfortunately, real property (other than certain leasehold improvements) generally does not qualify. Like the Section 179 deduction, property can be placed in service on the last day of the tax year and still qualify for the full tax break.

Planning for Education Expenses
Tuition Deduction. In 2009, you can deduct up to $4,000 of college tuition and related expenses, provided your adjusted gross income (AGI) is no more than $130,000 (for joint filers) or $65,000 (for single and head of household filers). If your AGI exceeds these limits, you can still deduct up to $2,000 of such expenses as long as your AGI does not exceed $160,000 (for joint filers) or $80,000 (for single and head of household filers). Although the deduction is available regardless of whether you itemize expenses, you cannot claim it if you claim an education credit for the same student.

Unlike many other tax breaks subject to income limits, this on does not phase out over a range of income. Instead, it’s all or nothing, depending on whether your income is above or below the threshold amounts. If you can benefit from this deduction, but your AGI is at or near the applicable limits, monitor your AGI level between now and year-end and, if possible, take steps to keep it below the limit.

Planning for Your Investments
For 2009, long-term capital gains and qualifying dividend income are subject to a federal tax rate of only 15% for taxpayers in a regular federal tax bracket of 25% or higher and 0% for taxpayers in the lower regular tax brackets. Given federal tax rates as high as 35% for other types of income, this is quite a break. Here are some ways to capitalize on it.

Lower Tax Rates on Dividends
The favorable federal tax rates (15% or 0%) might make dividend-paying stocks more attractive than they were in the past when dividends were taxed at ordinary income rates. This may cause you to reconsider the make-up of your investment portfolio. However, there are a few catches to the new rule. A key requirement for the lower tax rate on dividends is that the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stock, this period is 90 days during a 181-day period.

While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends do. Only dividends paid by so-called “qualified foreign corporations”. And finally, watch out for certain investments marketed as preferred stocks that are really debt instruments (e.g., trust preferred securities). Dividends received on these securities are not qualified dividends.

Lower Tax Rates on Capital Gains
To be eligible for the lower 15% (or 0%) federal capital gain rate, a capital asset must be held for more than a year. So, when disposing of your appreciated stocks, bonds, investment real estate, and other capital assets, pay close attention to the holding period. If it’s less than one year, consider deferring the sale so that you can meet the greater-than-one-year period. While it’s generally not wise to let tax implications drive your investment decisions, you shouldn’t ignore them either.

When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones you sell first. However, if you choose, you can specifically identify the share you’re selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it’s long-term or short-term.

Harvesting Capital Losses
It’s always a good idea to periodically review your investment portfolio to see if there are any losers you should sell. This is especially true as year-end approaches, since it’s the last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. But, don’t forget the wash-sale rule. This rule defers your loss if you purchase a substantially identical security within the period beginning 30 days
before and ending 30 days after the date of sale.

Vehicle Donation Rules
The deduction for charitable contributions of vehicles (generally including automobiles, boats, and airplanes for which the claimed value exceeds $500 and excluding inventory property) depends upon the use of the vehicle by the donee organization. If the donee organization sells the vehicle without any significant intervening use or material improvement of such vehicle by the organization, the taxpayer’s deduction cannot exceed the gross proceeds received from the sale.

OBSERVATION: Generally, charities sell these donated vehicles for a fraction of their fair market value. Thus, a taxpayer’s charitable contributions for such donations will be substantially limited.

Kiddie Tax
Unearned income of children under age 19 or full-time students under age 24 may be taxed at parents' rates.

New First-Time Home-Buyer Credit
Individuals may qualify for a refundable credit of up to $7,500 if they have not owned a principal residence in the past 3 years and purchase a principal residence after April 8, 2008 and before December 31, 2008.  The credit was increased to $8,000 for purchases between January 1, 2009 and April 30, 2010 (closing by June 30, 2010).

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• Forms W-2 for wages earned
• Forms 1099 for interest, dividend and capital gain income
• Interest received from municipal bonds
• Forms 1099 for distributions from retirement plans
• Year-end brokerage statements
• For sales of securities during the year:
• Purchase date and cost including commissions
• Sales date and price net of commissions
• Dependents’ full name, social security number and date of birth
• Educational expenses paid and year of student (fresh, soph, jun, sen)
• Year-end Social Security Statements
• Forms K-1 from partnerships, s-corporations, estates and trusts
• Contributions to IRA accounts
• Year-end mortgage statements showing mortgage interest paid and mortgage insurance premiums paid
• Settlement statement from house purchase or refinance during year
• Real estate and personal property tax (car tax) bills paid during the year even if you do not itemize
• Charitable donations (cash and non-cash)
• Medical expenses paid out-of-pocket (including health insurance and long-term care insurance premiums paid)
• Child care expenses paid including provider name, address, and identification number
• Interest paid on student loans
• Federal and state estimated tax payments made during the year
• Sales tax paid on purchase of a car during the year