Transcript of "Year End Tax Planning Tips Individuals 2009"
Kelly A. Chambers, CPA
Stambaugh Ness PC
November 13, 2009
If your company has a retirement plan…
contribute to it!
◦ The contributions are not taxable for federal
◦ Most companies have a “match”. This “match” is
FREE money and is not taxable!
**If you are not participating you are losing out on
a great benefit!
If your company has a Cafeteria (Section 125)
plan… contribute to it!
◦ Contributions toward health, specialized insurance, and
medical reimbursements are not taxable for federal, social
security, Medicare, state, local or federal unemployment
◦ Contributions for child care are not taxable for federal,
social security, Medicare or federal unemployment
**If you have to pay for these things anyway, why not do it
If you can Itemize deductions keep track of:
◦ Medical miles, employee business miles, charitable miles
◦ Out of pocket medical expenses
◦ Any personally paid expenses for your employment like tolls,
parking, uniforms, union dues, subscription fees, tools
◦ Job search expenses and moving expenses
◦ Sales tax paid on large purchases
◦ RE taxes for first and second homes
◦ Mortgage insurance (PMI)
◦ Mortgage interest
◦ Investment expenses
◦ Get receipts for donations of food, clothing, furniture, etc.
◦ Get receipts for cash donations
All of the above have certain limitations and/or restrictions, but
can lead to significant tax deductions.
An IRA is an Individual Retirement Account
There are two main types of IRA’s
1. Traditional IRA
2. Roth IRA
You can contribute up to $5,000 to an IRA
(Traditional or Roth) in 2009, or up to
$6,000 if you are age 50 or older.
Traditional IRA’s - Defer the tax until you
draw the funds out at retirement, then it is
taxed at your regular tax rate. You may be
entitled to a current year tax deduction for
contributions to the IRA.
Roth IRA’s - Does not provide a current
year tax deduction, but does provide a
TAX-FREE distribution when drawn in
There currently are two ways to fund a
1. Direct contribution
2. Rollover of funds from an eligible employer
retirement plan; SEP IRAs and SIMPLE IRAs
qualify after two years of participation.
There currently are three ways to fund a Roth
1. Direct contribution
2. Conversion of all or part of a traditional IRA
to a Roth IRA
3. Rollover of funds from an eligible employer
retirement plan; SEP IRAs and SIMPLE IRAs
qualify after two years of participation.
The ability to contribute directly to a Roth IRA depends on
your income level as measured by modified adjusted gross
As of 2010 the $100,000 MAGI limits for Roth Conversion is
You will have to pay income tax on the taxable portion of the
Traditional IRA at the time of conversion, but when drawn in
retirement it will then be TAX-FREE.
With a 2010 conversion, you can choose to spread the
resulting taxable income evenly over 2011 and 2012 and
thereby defer the related taxes.
A credit of up to 30 percent of expenditures for qualifying
home improvements and equipment for your personal
residence in 2009 and 2010; this credit will expire at the end
of 2010 unless Congress extends it.
There are no income limits on the credit, and you can use it
to reduce both your regular federal income liability and any
alternative minimum tax (AMT).
Maximum combined credit for 2009 and 2010 is limited to
$1,500; if you claim an $800 credit this year, you can only
claim up to another $700 in 2010.
This credit covers a wide range of common energy-saving
o Exterior doors including storm doors
o Exterior windows including skylights and storm windows
o Insulation systems designed to reduce heat loss or gain
o Metal and asphalt roofs with heat reduction component
o High-efficiency central air conditioners*
o Furnaces, water heaters, and water boilers that run on natural
gas, propane, or oil*
o Electric heat pumps and electric heat pump water heaters*
o Circulating fans used in natural gas, propane, oil furnaces*
o Biomass fuel stoves used for heating or hot water*
*Items 5 through 9 include costs for site preparation,
assembly and installation.
To claim the credit, you must obtain a
manufacturer's certification that the product
is eligible for the credit.
After May 31, 2009, Energy Star label
windows and skylights don't automatically
qualify. You may find the certification on
the packaging, or you may have to print it
out from the manufacturer's Web site.
Keep this with your tax records.
$1,500 two-year credit limit
You spend $3,000 in 2009 for some qualifying new
windows and a heat pump water heater.
You can claim a $900 credit on your 2009 return ($3,000 x 30%
In 2010 you spend a total of $7,000 for a
qualifying central air conditioner and some
qualifying attic insulation.
Unfortunately, you can't claim $2,100 credit on your 2010 return
($7,000 x 30% = $2,100). Instead, you can only claim the $600
that remains from the two-year $1,500 limit ($1,500 - $900
already claimed in 2009 = $600 left for 2010).
Why is this so great?
◦ Because it covers a wide range of common
energy-saving expenditures that you might
already have done or plan to do anyway.
◦ It is a Tax Credit rather than a deduction.
Credits are more valuable because they reduce
your federal income tax bill dollar for dollar. In
contrast, a deduction only reduces your tax bill
by a percentage of a dollar (equal to your
marginal tax rate).
For 2009 through 2016, you can claim another separate
federal income tax credit equal to 30 percent of expenditures
to buy and install more unusual (and more expensive)
energy-saving equipment for your home.
Except for fuel cell equipment, there is no dollar limit on this
credit, so big expenditures can translate into big credits, and
this can go on year after year through 2016.
There are no income limits on this credit and you can use it to
reduce both your regular federal income liability and any
If your expenditures generate a large credit that exceeds your
2009 tax bill, you can carry the excess credit amount over to
next year and beyond.
Qualifying expenditures for the following items,
including costs for site preparation, assembly,
installation and related piping and wiring.
◦ Solar water heating equipment for your residence*
◦ Solar electricity generating equipment for your
◦ Wind energy equipment for your residence*
◦ Geothermal heat pump equipment for your residence*
*These can include a U.S. vacation home but a residence in a foreign
location does not qualify.
◦ Fuel cell electricity generating equipment for your
U.S. principal residence (vacation homes are not
eligible); the maximum annual credit for fuel cell
equipment is limited to $500 for each .5 kilowatt
hour of capacity.
There is no dollar limit on the credit for the first four.
Note: You can't claim this credit for equipment used to heat a
swimming pool or hot tub. Special rules apply to expenditures
for residential co-ops and condo buildings.
You must obtain a manufacturer's certification on this
equipment and keep it with your tax records.
Purchases of a principal residence by a first-time home buyer
after December 31, 2008 and prior to November 30, 2009.
Under these rules, a qualified first-time home buyer may be
eligible to receive a tax credit up to $8,000 ($4,000 for
Married filing separate) when purchasing a home.
The new provisions eliminated the requirement to repay the
IRS after 36 months in the home.
The credit phase-outs that start for taxpayers with AGI in
excess of $75,000 ($150,000 for joint filers) continue to
Recently, the First-Time homebuyer credit was
extended to April 30, 2010.
If a binding contract is entered into prior to May 1,
2010 and settlement occurs before July 1, 2010 the
credit will be treated as not expiring until July 1,
The new law increases the credit phase-outs to
start for taxpayers with AGI in excess of $125,000
($225,000 for joint filers).
A "first-time homebuyer" is any individual (and
spouse if married) who had no present
ownership interest in a qualifying principal
residence during the 3-year period ending on
the date of purchase of the principal
residence for which a first-time homebuyer
credit is being claimed.
Legislation that passed last week added a new
provision for Non-First-Time Homebuyers.
It allows up to a $6,500 ($3,250 for Married filing
separate) credit for the purchase of a new home to
homeowners who have lived in their principal
residence for 5 consecutive years during the past 8
The credit phase-outs start for taxpayers with AGI
in excess of $125,000 ($225,000 for joint filers).
Purchasers of new vehicles for 2009 would be
allowed an above-the-line deduction for state and
local sales taxes or excise taxes paid on the
There are two limits on this new deduction:
1. Deductible sales tax cannot exceed the portion of the tax
attributable to the first $49,500 of the purchase price of
any one vehicle. (For PA that would be $2,970)
2. Any deduction will be phased out to the extent the
purchaser has adjusted gross income exceeding $125,000
($250,000 for joint returns).
Any newly purchased vehicle, including cars, SUVs, light
trucks, motorcycles, first used by the taxpayer that weighs
no more than 8,500 gross pounds generally qualifies.
You may be able to take a tax credit for qualifying
expenses paid to adopt an eligible child (including
a child with special needs).
Not available for any reimbursed expense.
The maximum adoption credit is $12,150.
In addition to the credit, certain amounts paid by
your employer for qualifying adoption expenses
may be excludable from your gross income.
The maximum exclusion from income for benefits
under your employer's adoption assistance
program is also $12,150.
These amounts are phased out if your modified AGI
is between $182,180 and $222,180.
You cannot claim the credit or exclusion if your
modified AGI is $222,180 or more.
You may be eligible to take an increased credit or
exclusion for expenses related to the adoption of a
child with special needs.
Qualifying expenses include reasonable and
◦ Adoption fees
◦ Court costs
◦ Attorney fees
◦ Traveling expenses (including amounts spent for meals and
lodging while away from home)
◦ Other expenses directly related to and for which the principal
purpose is the legal adoption of an eligible child*
The adoption credit or exclusion cannot be taken for a child
who is not a United States citizen or resident unless the
adoption becomes final.
*An eligible child must be under 18 years old, or be physically
or mentally incapable of caring for himself or herself.
Up to $2,500 per student
Available for the first four years of post-secondary
Student required to be enrolled at least half-time
Qualified tuition and related expenses include
expenditures for "course materials" such as books,
supplies, and equipment needed for a course of study
Cannot claim the credit if you or anyone else claims
the Lifetime Learning Credit for the same student in
the same year
Generally, 40% of the credit is a refundable credit,
which means that you can receive up to $1,000
even if you owe no taxes.
Phase out starts if your MAGI is between $80,000
and $90,000 ($160,000 and $180,000 if you file a
For 2009 only, if you claim the credit for a student
who attended a school in a Midwestern disaster
area, you can choose to figure the credit using the
previous rules, but then required to do so for all
students for which you claim the credit.
The credit is equal to 20% of the first $10,000 of
out-of-pocket expenses for qualified tuition and
related expenses of all eligible family members, up
to a maximum of $2,000 in expenses annually.
Same expenses qualify as the Hope Credit; these
expenses must be related to a postsecondary
education at an eligible educational institution.
Unlike the Hope Scholarship Credit, students are
not required to be enrolled at least half-time.
You cannot claim the credit if you or anyone else
claims the Hope credit for the same student in the
Phase out starts if your MAGI is between $50,000
and $60,000 ($100,000 and $120,000 if you file a
joint return). You cannot claim a lifetime learning
credit if your MAGI is $60,000 or more ($120,000
or more if you file a joint return).
A Deduction of up to $4,000 is available to help
parents and students pay for post-secondary
You do not have to itemize to take the deduction.
You cannot take the deduction if your filing status
is married filing separately or you are claimed, or
can be claimed, as a dependent on someone else's
You cannot claim the deduction if you or anyone
else claims the Hope or Lifetime Learning Credit for
the same student in the same year.
You cannot claim a deduction on expenses paid
with tax-free scholarship, fellowship, grant, or
education savings account funds such as a
Coverdell education savings account, tax-free
savings bond interest or employer-provided
The same rule applies to expenses you pay with a
tax-exempt distribution from a qualified tuition
plan (Example 529 Plan), except that you can
deduct qualified expenses you pay only with that
part of the distribution that is a return of your
contribution to the plan.
Deduction of up to $2,500.
Loan must have been taken out solely to pay
qualified education expenses, and cannot be
from a related person or made under a
qualified employer plan.
Does have income limitations.
Up to a $1,000 credit per qualifying child
A portion of it may be refundable
A qualifying child is a child who:
◦ Is your son, daughter, stepchild, foster child, brother,
sister, stepbrother, stepsister, or a descendant of any of
them (for example, your grandchild, niece, or nephew)
◦ Was under age 17 at the end of 2009
◦ Did not provide over half of his or her own support for
◦ Lived with you for more than half of 2009, was a U.S.
citizen, a U.S. national, or a U.S. resident alien
◦ Adopted child is always treated as your own child and
includes a child lawfully placed with you for legal adoption
If you have earned income and paid someone to care
for your child or other qualifying person so you (and
your spouse if filing jointly) could work or look for
work in 2009.
◦ A dependent child under 13 years old
◦ Your disabled spouse or other dependent unable to care for
A Maximum credit of up to $1,050 for one
dependent and $2,100 for two or more dependents.
Credit is calculated based on income and applicable