Don't Be a 2009 Tax Ostrich!

Hopefully, you have your 2008 tax return behind you. But even if your 2008 return is on extension, don’t think you can put off worrying about 2009 until next year! Congress has created a number of tax incentives to help stimulate the economy and, in some cases, you need to take action to benefit from those incentives. These incentives include the hybrid and lean-burn vehicle credits, the vehicle sales tax deduction, and the home energy efficiency and energy generation credits. In addition, there are other incentives, strategies and issues that can seriously impact your 2009 tax return.

• Consider Purchasing a Home – If you don’t own your home, you might consider buying one. Interest rates are low and so are home prices. Where rent payments are not deductible, home mortgage interest and property taxes are allowed, providing most taxpayers with additional tax deductions. This may permit you to reduce your withholding and provide more cash flow during the year.

If you are a first-time homebuyer and purchase the home before December 1, 2009, you may also be able to take advantage of the $8,000 first-time homebuyer credit. This is unlike the credit in 2008, since it is not a loan that needs to be paid back. The IRS’ very liberal definition of a “first-time homebuyer” is someone who hasn’t owned a home in at least three years.

Need help with the down payment? Consider utilizing one or both of these tax rules:

(1) You (and your spouse, if married) can each tap your respective IRA accounts penalty-free for up to $10,000 each. The IRA distributions, however, are taxable.

(2) If you qualify for the first-time homebuyer credit, after the purchase of your home is completed, you can amend your 2008 federal return to claim the credit (yes, even though the purchase was made in 2009); you don’t have to wait until your 2009 return is filed in 2010.

If you are thinking about helping a child or relative with their first home, this may be an opportune time for that as well.

There are other details to be concerned with, and some states are offering their own versions of home buying credits, so you may wish to schedule an appointment to see how a 2009 home purchase will play out for your particular circumstances and income level.

• Take Advantage of Loss Carryovers – You may have seen your stock portfolio take a dive in 2008 and you sold off many of these investments. Since investment losses cannot result in a deductible loss greater than $3,000 a year on your tax return, you probably have substantial loss carryovers, which can provide you with a $3,000 loss for a number of years. These loss carryovers can also be used to offset current year gains from sales of other investments, such as land, rental property, a vacation home, and other capital assets. So, if you are sitting on a gain because you don’t want to pay the taxes, this may be an opportunity to utilize the carryover losses.

• Keep An Eye On Your Withholding – The new “Making Work Pay Tax Credit” is being paid to taxpayers in advance through reduced payroll withholding. The reduction was accomplished by tweaking the withholding tables, which does not consider your specific tax circumstances. You may not have even noticed the difference, especially when spread over weekly, bi-weekly, or semi-monthly payroll checks. However, the amounts add up over time and could cause you to owe more federal income tax when your 2009 tax return is filed. This could be especially troubling for married individuals who both work and have their withholding adjusted.

• More Investment Flexibility for 529 Plans – Section 529 Qualified Education plans are tax-advantaged savings plans that can be used to pay qualified education expenses. For calendar year 2009 only, 529 plans may permit accounts to change their investment strategy twice (as opposed to once under prior rules) during the year, as well as upon a change in the designated beneficiary of an account. This new flexibility was prompted by concerns from 529 plan sponsors that in today's market environment the lack of flexibility in switching investments could imperil many 529 accounts.

• Clarifying Waivers of RMDs for 2009 – Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions (RMDs) for 2009. However, this special one-year relief from taking RMDs does not apply to 2008 RMDs that were deferred until 2009, and those distributions must be taken in 2009.

The 2009 RMD waiver applies to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010 (generally, retired employees and IRA owners who attain age 70-1/2 in 2009). However, the law does not waive any RMDs for 2010.

For beneficiaries taking distributions over a five-year period, he or she can waive the distribution for 2009, effectively permitting the beneficiary to take distributions over a six-year period.

• Unemployment Withholding – If you are drawing unemployment compensation, you are probably aware that a recent law change makes the first $2,400 of unemployment benefits tax free for each individual. If married with both spouses drawing unemployment, each can exclude the first $2,400 of their individual unemployment benefits. But don’t become complacent and overlook the fact that the balance of the unemployment you receive will be taxable, and over time that can add up to a significant amount of taxable income. If you don’t have any tax withholding, you can dig yourself a significant tax hole. You don’t need to end up with a big tax liability on your 2009 return when you are already struggling to make ends meet. Taxes can be withheld from your unemployment payments by completing and submitting a W-4V. If you need assistance, please call this office.

• Consider a Mid-Year Tax Consultation – June through August is a great time to sit down and review your year-to-date tax status, discuss strategies, review the scenarios included in this newsletter, and extrapolate the 2009 outcome based on your income for the first part of the year. If you would like to arrange an office or teleconference appointment to review your specific circumstances, please give this office a call.

If you have questions regarding any of the topics included in this article, this office can help you.

---