JAMES M. SEARS

ATTORNEY AT LAW

7 FEDERAL STREET, SUITE 17

DANVERS, MASSACHUSETTS 01923

Tel. 978-777-2104

Fax 978-750-6940

searsandsears@aol.com

Client Letter — 2009 Year-End Tax Planning for Individuals

Dear Client:

As 2009 draws to a close, there is still time to reduce your 2009 tax bill and plan ahead for 2010. This letter highlights several potential tax-saving opportunities for you to consider. I would be happy to meet with you to discuss specific strategies. As you may know, my qualifications include a Masters of Law degree in Taxation from the Boston University School of Law as well as 21 years of experience in all areas of personal and business federal and state income tax preparation.

Basic Numbers You Need To Know

Because many tax benefits are tied to or limited by adjusted gross income (AGI) - IRA deductions, for example - a key aspect of tax planning is to estimate both your 2009 and 2010 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2008 tax return and your 2009 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI.

Another important number is your “tax bracket,” i.e., the rate at which your last dollar of income is taxed. The tax rates for 2009 are 10%, 15%, 25%, 28%, 33%, and 35%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).

Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles

In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less.  A qualified motor vehicle also includes a motor home, the original use of which begins with that purchaser.  The amount of tax you are able to deduct is limited to the tax that is imposed on the first $49,500 of the purchase price of the vehicle.  The deduction is phased out over a $10,000 range that begins when modified adjusted gross income is more than $125,000 ($250,000 if married filing a joint return). No deduction is allowed when modified adjusted gross income is equal to or more than $135,000 ($260,000 if married filing a joint return). The new deduction can be used to increase the amount of your standard deduction or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).

First-Time Home Buyer Extended Tax Credit of up to $8,000 extended until April 30, 2010

First-time home buyers who purchase a new or existing home between November 7, 2009 and April 30, 2010 are eligible for a maximum $8,000.00 Extended Home Buyer Tax Credit. To qualify as a "first-time home buyer" the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase. This credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops. This credit is only available on homes purchased for $800,000 or less and the maximum amount of the credit is available to single buyers with incomes up to $125,000 and married couples with incomes up to $225,000. A reduced credit is available for singles whose income is does not exceed $145,000 and for a married couple whose income is does not exceed $245,000. Eligible purchases must be under contract on or before April 30, 2008 and the purchase must close on or before June 30, 2010. This tax credit does not have to be paid back so long as the newly purchased home is not sold and the purchasers continue to occupy it within the 3 year period after it was purchased.

Home Buyer Extended Tax Credit of up to $6,500 extended to Current Home Buyers

Current Homeowners who have owned and occupied their current home as their principal residence for five consecutive years within the last eight years and who purchase a new or existing home between November 7, 2009 and April 30, 2010 are eligible for a maximum $6,500.00 Extended Home Buyer Tax Credit. This credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops. This credit is only available on homes purchased for $800,000 or less and the maximum amount of the credit is available to single buyers with incomes up to $125,000 and married couples with incomes up to $225,000. A reduced credit is available for singles whose income is does not exceed $145,000 and for a married couple whose income is does not exceed $245,000. Eligible purchases must be under contract on or before April 30, 2008 and the purchase must close on or before June 30, 2010. This tax credit does not have to be paid back so long as the newly purchased home is not sold and the purchasers continue to occupy it within the 3 year period after it was purchased.

Additional Standard Deduction for Real Estate Taxes

There is an additional standard deduction for those who don’t qualify to itemize their tax deductions, but who do pay state or local real estate taxes. This deduction is available for the 2008 and 2009 tax years.

Here are six things you need to know about the additional standard deduction for real estate taxes:

1.      The additional deduction amount is equal to the amount of real estate taxes paid. The amount can be up to $500 for single filers or up to $1,000 for joint filers.

2.      The taxes must be imposed on you.

3.      You must have paid the taxes during your tax year.

4.      The taxes must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks and sewer lines. These taxes usually cannot be deducted.

5.      Real estate taxes paid on foreign or business property do not qualify for the increased standard deduction.

6.      You must file a Form 1040 or 1040A to claim the additional deduction. When claiming the additional standard deduction for real estate taxes, be sure to check the box on line 39c of Form 1040 or line 23c of Form 1040A.

ROTH IRAs

Non-Business Energy Property Credit

Taxpayers who take energy saving steps this year may get bigger tax savings next year. The Non-business Energy Property Credit, a tax credit for making energy efficient improvements to homes has been increased as part of the American Recovery and Reinvestment Act of 2009. Homeowners who have been considering some energy efficient home improvements may find these tax credits will get them bigger tax savings next year.

Here are seven things the IRS wants you to know about the Non-business Energy Property Credit:

1.      The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010 combined.

2.      The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

3.      To qualify as "energy efficient" for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.

4.      Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers' Website.

5.      Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.

6.      The improvements must be made to the taxpayer's principal residence located in the United States.

7.      To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made.

Deferring Income to 2010

If you expect your AGI to be higher in 2009 than in 2010, or if you anticipate being in the same or a higher tax bracket in 2009, you may benefit by deferring income into 2010. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Some ways to defer income include:

Delay Billing: If you are self-employed, delay year-end billing to clients so that payments will not be received until 2010.

Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.

Accelerating Income into 2009

In limited circumstances, you may benefit by accelerating income into 2009. For example, you may anticipate being in a higher tax bracket in 2010, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note however that accelerating income into 2009 will be disadvantageous if you expect to be in the same or lower tax bracket for 2010. In any event, before you decide to implement this strategy, we should “crunch the numbers.”
If accelerating income will be beneficial, here are some ways to accomplish this:

Accelerate Collection of Accounts Receivable: If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection before the end of 2009. Also see if some of your clients or customers might be willing to pay for January 2010 goods or services in advance. Any income received using these steps will shift income from 2010 to 2009.

Year-End Bonuses: If your employer generally pays year-end bonuses after the end of the current year, ask to have your bonus paid to you before the beginning of 2010.

Retirement Plan Distributions: If you are over age 59 ¹/₂ and you participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2010.

You may also want to consider making a Roth IRA rollover distribution.

Deduction Planning

Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, remember to keep the following in mind:

Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid.

Payment by Check: Date checks before the end of the year and mail them before January 1, 2010.

Promise to Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2009, you can take the deduction even though you won't pay your credit card bill until 2010.

Standard Deduction Planning: Deduction planning is also affected by the standard deduction. For 2009 returns, the standard deduction is $11,400 for married taxpayers filing jointly, $5,700 for single taxpayers, $8,350 for heads of households, and $5,700 for married taxpayers filing separately. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. You can do this by paying in 2009, deductible expenses, such as mortgage interest (including for 2009 mortgage insurance premiums), due in January 2010.

Medical Expenses: Medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 7.5% of AGI. Consider bunching medical expenses into years when your AGI is lower.

State Taxes: If you anticipate a state income tax liability for 2009 and plan to make an estimated payment, consider making the payment before the end of 2009. Note that in 2009, you can choose to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.

Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2009 even though you will not pay the bill until 2010. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.

To avoid capital gains, you may want to consider giving appreciated property to charity.

Business Deductions

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor.

Equipment Purchases

Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act:

The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, extended the bonus depreciation and increased the section 179 deduction. For many businesses, these two provisions are only available this year and, as a result, they only have a few months to take action and save on their taxes. Here is a quick rundown of these provisions.

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009 ($285,000 for qualifying enterprise zone property and qualifying renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.

Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.

• Machinery and equipment.

• Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.

• Gasoline storage tanks and pumps at retail service stations.

• Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

When you use property for both business and non-business purposes, you can elect the section 179 deduction only if you use the property more than 50 percent for business in the year you place it in service. If you use the property more than 50 percent for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify. Publication 946 explains various situations that describe property not acquired by purchase. There are also special rules for acquiring property from related persons. These rules are also explained in Publication 946.

Special depreciation allowance for certain property. The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. You may be able to take an additional first year special depreciation allowance for certain qualifying property (defined below). The allowance is an additional deduction of 50 percent of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).

Property that qualifies for this special depreciation allowance includes the following.

• Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less

• Water utility property

• Off-the-shelf computer software

• Qualified leasehold improvement property

Qualified property must also meet all of the following tests.

• You must have acquired qualified property after December 31, 2007, and before January 1, 2009. If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify.

• Qualified property must be placed in service before January 1, 2010 (before January 1, 2011, for certain transportation property and certain property with a long production period).

• The original use of the property must begin with you after December 31, 2007.

Property that does not qualify for special depreciation allowance includes the following.

• Property placed in service and disposed of in the same tax year.

• Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may qualify

• Property required to be depreciated under the alternative depreciation system (ADS).

• Property included in a class of property for which you elected not to claim the special depreciation allowance.

• Certain restaurant property placed in service after December 31, 2008.

• Certain retail improvement property placed in service after December 31, 2008.

• Property for which you elected to accelerate certain credits in lieu of the bonus depreciation allowance.

Depreciation limits on business vehicles: The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) that you use in your business and first placed in service in 2009 is $2,960 ($10,960 for automobiles for which the special depreciation allowance applies). The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2009 is $3,060 ($11,060 for trucks or vans for which the special depreciation allowance applies).

Keep in mind that February through April is an extremely busy income tax preparation season for my office. So please be sure to provide me with your tax return information in early February/March to allow time to process your tax returns in a timely manner.

Happy Holidays and good health to all of my clients and their families.

                                                                   James M. Sears

PS: Please check out our Internet Web Page at www.SearsLawOffice.com.