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Midyear Tax-Saving Opportunities for 2009

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Changes in both the tax law and the economy create new tax-­saving opportunities in 2009 — as the ­recession makes every tax dollar saved more valuable. Midyear tax-saving strategies to consider…

Buy a new car — or truck, motorcycle or motor home. Sales tax incurred on the purchase is deductible on 2009 tax returns.

Rules: The purchase must be made after February 16, 2009, and before January 1, 2010. State and local sales and excise taxes on purchases up to $49,500 are deductible whether or not you itemize your deductions. The deduction is phased out as modified adjusted gross income (MAGI) increases from $125,000 to $135,000 on a single return or $250,000 to $260,000 joint.

Become a “first-time” home buyer. The recently enacted federal economic stimulus bill creates a tax credit of 10% of the purchase price up to $8,000 for first-time home buyers. You are deemed a “first-time buyer” if you haven’t owned a primary residence during the prior three years. The home must be purchased on or after January 1 and before December 1, 2009. (Note: If you are building the home, you must occupy it by this date.)

You can get the credit right away, in the form of a tax refund, by claiming the credit on your 2008 tax return. If you’ve already filed your 2008 return, amend it to claim the credit by filing IRS Form 1040X.

Limit: The credit is phased out as MAGI rises from $75,000 to $95,000 on a single return and $150,000 to $170,000 joint.

Do not take an annual required minimum distribution (RMD) for 2009 from your IRA or 401(k). The normal rule requiring RMDs for people over age 70½, as well as beneficiaries of any age, is suspended in 2009. This can save you from cashing in IRA and 401(k) investments while the markets are very low.

If you’ve already taken an RMD, you can reverse it if you make a rollover of the distributed funds back into your retirement account within 60 days.

Consider converting a traditional IRA to a Roth IRA. You might want to make a conversion from a traditional to a Roth IRA because all withdrawals from a Roth IRA can be tax free, while withdrawals from traditional IRAs are taxable. Another reason is that Roths are not subject to RMDs during your lifetime, so you can leave funds in longer to continue to collect tax-free investment returns. Now can be an opportune time to convert, for two reasons…

  • The value of a traditional IRA (minus any nondeductible contributions made to it) is included in your taxable income when it is converted to a Roth IRA. If your IRA’s value is at a temporary low due to the slumping investment markets, you can make the conversion at a low, bargain tax cost.
  • The conversion option is normally available only to people with AGI not exceeding $100,000. (The income and filing status limitations are lifted starting in 2010.) If the recession has reduced your income to below that amount, you may be newly eligible to make a conversion. If you later decide that the conversion was a mistake, you can reverse it as late as October 15, 2010.
  • Make gifts to family members. With investment and property values down, you can pass more assets free of gift tax using the $13,000 per recipient annual gift tax exclusion… and the $1 million lifetime gift tax exempt amount (for gifts larger than the annual exclusion amount). Assuming that the assets later recover in value, you will have passed them along at a very advantageous time, tax-wise.

    Update your will and estate plan. In 2009, the amount of an estate that is exempt from federal estate tax increases to $3.5 million. If your will includes strategies tied to the old $2 million number (for 2008), it is out of date. Also, the big changes and overall drop in asset and investment values may have greatly changed the value of various bequests in your will — or even eliminated the ability of your estate to make certain distributions planned in your will.

    Revise charitable donation methods. Many people donate appreciated stocks, securities and property to charity. That’s because when long-term capital gain property is donated to charity, a charity deduction for its full fair market value is allowed, and no capital gains tax on the appreciation ever becomes due.

    Trap: If you donate to charity property that has declined in value to less than what you paid for it, you forfeit the capital loss deduction that would be available if you sold it instead.

    So when using a property that has declined in value to finance a charitable contribution, it’s better to first sell the property, which lets you secure a tax deduction for the capital loss, then donate the cash sale proceeds to charity.

    Harvest capital losses. Capital losses can be used to shelter capital gains from tax. If your net capital losses for the year exceed capital gains, a net capital loss of up to $3,000 is deductible against salary and other ordinary income. Excess capital losses over that amount can be carried forward for use in future years.

    Secure deductions for “near-worthless” securities and bad debts. If the recession has rendered stock shares, other securities you own or debts owed to you worthless, you can deduct your loss on them. But if they retain even minimal value, no deduction will be allowed for them until they become totally worthless.

    Such minimal value may exist if the issuer of the security or debt is involved in bankruptcy or other litigation with an uncertain outcome.

    Tactic: Secure your loss now by selling the securities and debt claims for some small amount, even only $1. The sale makes your loss final, and deductible.

    Review how you pay estimated taxes. Most people pay estimated taxes by basing the current year’s payments on the actual amount of tax paid for the prior year. When income increases from year to year, this is a good option — it not only simplifies payment calculations, but also lets the payment of some tax (the increase of this year’s over the prior year’s) be deferred until you file your tax return, without penalty.

    Snag: If your income in 2009 will be lower than in 2008, basing this year’s estimated payments on last year’s tax liability will cause you to overpay tax. Instead, make correct, smaller estimated payments this year by estimating your actual income quarter to quarter.

    Transfer assets to provide tax-free dividends and capital gains to lower-income family members. In 2009, long-term capital gains and dividends are tax-free to people in the 10% and 15% regular tax brackets.

    These tax brackets cover taxable income up to $33,950 on a single return and $67,900 on a joint return. But after also taking the standard deduction ($5,700 single, $11,400 joint) and personal exemptions ($3,650 single, $7,300 joint) much more income can be received while staying in these tax brackets — up to $43,300 single and $86,600 joint. If you’re single and age 65 or older, you get an additional standard deduction of $1,400 ($1,100 per person if married filing jointly and age 65 or older).

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    Source: Sidney Kess, an attorney and CPA in New York City. Mr. Kess is coauthor/consulting editor of Financial and Estate Planning (monthly, $1,589/yr.) and coauthor of 1040 Preparation and Planning Guide 2009 (CCH). Over the years, he has taught tax law to more than 700,000 tax professionals across the country. Date: July 1, 2009 Publication: Bottom Line Personal
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