Year End Tax Planning for Individuals

As the holidays & end of the year fast approach, I’m going to ask you to take a few minutes to review your tax situation for 2009 to see if some of the following ideas may save you some money on your taxes come next spring. As with everything else, you need to consult your own CPA or tax advisor for advice specific to your situation. This post only covers a portion of possible opportunities that may be available to you and there are also some hurdles (like the Alternative Minimum Tax) that may trip you up & keep you from being able to use some of these suggestions. Also, the clock is ticking REALLY fast as some of these opportunities expire on December 31, 2009.

Traditionally, the typical year end tax strategy is to defer income into next year and accelerate deductible expenses into this year. This is done to defer paying income taxes. Think of it as kicking the “tax” can further down the street. This holds true in years where you expect to be in the same or lower tax bracket the following year. If you expect the opposite to be true (higher tax bracket), then accelerate income and postpone deductible expenses. This way more income is taxed at a lower rate. Currently, tax rates for 2011 will be going up for the high-end tax brackets as the Bush tax cuts are allowed to expire. With the programs that the current administration has on its’ agenda to implement, I do not see how they can keep from raising the tax rates on the middle class in 2011 as well.
Here are a few year-end tax planning ideas for your individual returns:

American Opportunity Education (AOE) Tax Credit – This used to be called the “HOPE” scholarship credit. The Stimulus Bill has increased and expanded the educational tax credit. For 2009 and 2010, the credit is 100% of the first $2,000 of qualified educational expenses plus 25% of the next $2,000 of qualified expenses. The maximum credit amount is $2,500 per student per year. Additionally, the credit now applies to the first 4 years of post-secondary education. It was only 2 years under prior law. Qualified expenses include tuition, fees and course materials including books. The old law did not include books. The credit starts phasing out for taxpayers with an adjusted gross income (AGI) of $80,000 (single)/$160,000 (married.)
Tuition Deduction – For taxpayers who don’t qualify for the AOE Tax Credit, there is a deduction allowed for up to $4,000 of tuition and fees paid to an accredited post-secondary school. The deduction is not available to those with an AGI over $80,000 (single)/$160,000 (married).
Estimated Tax Payments-Small Business Owners – For 2009, the “safe harbor” provision for taxpayers in order to avoid underpayment penalties has been expanded. Taxpayers can avoid the penalty if the taxpayer has withheld or makes estimated tax payments totaling 90% of the previous year’s tax return. It was 100% under the old law. The taxpayer’s AGI must have been less than $500,000 and more than 50% of the gross income on the previous year’s return must have come from the small business. NOTE: This provision doesn’t apply to “C” corporations.
Sales vs. Income Tax Deduction – You are allowed to deduct the state & local sales taxes paid instead of the state & local income taxes if you choose. This provision would be most beneficial to those of you in states with no income taxes.
Sales Tax Deduction on Vehicles – For vehicles purchased from February 18th through December 31st, 2009, you can deduct state and local sales taxes on the purchase. The vehicle purchase price cannot exceed $49,500. Vehicles with a gross vehicle weight (GVW) that qualify include: passenger autos, light trucks and motorcycles. Motor homes also qualify with no GVW restrictions. You can take this deduction whether you itemize your deductions or not. The deduction phases out for those whose modified AGI is over $125,000 (single)/$250,000 (married.)
Additional Standard Deduction – For 2009, an additional standard deduction amount is available to those who pay real estate taxes and who do not itemize. The amount is the lesser of the state & local real estate taxes paid during the year or $500 (single)/$1,000 (married.) This expires 12/31/09.
First-Time Homebuyer’s Credit – This credit was expected to end on November 30, 2009. However, it was extended to April 30, 2010 in early November by the bill passed that extended unemployment benefits. This law allows those who haven’t owned a home in the U.S. during the previous 3-year period prior to buying the home a tax credit equal to 10% of the purchase price up to $8,000. The home has to be purchased with a signed contract by April 30, 2010 and it must close by June 30, 2010. The credit is equal to 10% of the purchase price of the home up to a maximum credit of $8,000. The purchase price of the home cannot exceed $800,000 to be eligible for the credit. The credit is a refundable credit meaning you may receive a check from the IRS if you have a zero tax liability. The credit phases out at the following income levels: Single - $125,000 - $145,000. Married filing Joint - $225,000 - $245,000. The taxpayer must be at least 18 years old and not a dependent. Related party transactions (sales between family members) are not eligible for the credit.
The law has also been expanded to include current homeowners who do not qualify for the 1st Time Homebuyer’s Credit. Current homeowners are eligible for a credit up to $6,500 for buying a new house as long as they’ve lived in their current home as their principal residence for 5 consecutive years out of the 8 years prior to the sale of the house.
These are just some of the deductions and credits available. You have until December 31, 2009. Talk to your CPA or tax advisor to discuss your specific situation.
U.S. Treasury Department Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This article is not intended to be comprehensive in nature and competent professional tax advice should be sought in determining the issues that impact your specific situation.
Michael A. Bohinc is a certified public accountant in Cleveland, OH. He is also a licensed HVAC and plumbing contractor in the State of Ohio. He is a Consult & Coach Partner for the Service Roundtable. He has over 20 years’ experience working on business management issues in the HVAC and plumbing industries. He can be reached at: 440/ 708-2583, e-mail mbohinc@keepingscorecpa.com.