Tax Planning for the Year End

As published in the Business Ledger – December 10, 2009
Law Talk
By Denice A. Gierach

In a short time, the year 2009 will be history.  For many people, they will be happy for a fresh start in the New Year, hopefully full of new opportunities to grow their businesses and in turn grow their families.  It is a time of celebration, of sharing thanks love and connection with families and those that we cherish.

It is also the time to do some year end tax planning.  These days, there are various easings in the tax law that will expire at the end of 2009 and some where the new rules take effect after the end of 2009.  Some of these rules are for personal transactions and some for business transactions.

For instance, the credit for first time homebuyers has now been extended and further liberalized.  The new law now applies to contracts to purchase a residence before May 1, 2010 and the purchase must close by July 1, 2010.  The maximum credit is $8,000 or 10% of the purchase price for first time homebuyer and is phased out at certain income levels.  One interesting provision is that spouses who have maintained the same principal residence for any five consecutive years during an eight year period of time are treated as a first time homebuyer, subject to certain limits.

If your company has a flexible employee benefit plan that includes payments for health insurance and the payment of medical expenses that are tied to a 12-month cycle which ends on December 31st, make sure to use the plans before the end of the year.  For instance, if you need a surgical procedure and have used up your deductible and the portion you need to payout in one year, consider having your surgery before the end of the year.  If you have not had your normal physical or your annual dental appointment, consider making those appointments before the year end.  This is especially true if your plan does not allow the dollars to roll over into 2010 and you lose those dollars.

There are no required year end distributions this year from IRA’s this year for those individuals who are 70-1/2 and older.  It is unlikely that this relief will be extended into 2010.  This allows someone who is required to take out a portion of their account every year to leave the money in the account to grow tax free for another year.

If you are expecting to owe a substantial amount of tax next April for your individual returns, consider increasing your withholding out of your remaining paychecks or plan payouts between now and the end of the year.  Since withholding is treated as if it were paid in ratably throughout the year, you may be able to reduce or eliminate any underpayment penalty if the amount of your withholding exceeds the safe harbor test.  

For business owners, shifting income between years can create tax savings.   A professional can postpone billings until 2010 to collect less in 2009, if this is a big tax year, or alternatively, speed up the end of the year billings to collect more in 2009, if they expect to be in a higher tax bracket next year.  There are also some options towards the end of the year with respect to the payment of expenses, provided that such choices do not distort earnings.

A business can delay paying 2009 year end bonuses so that they aren’t taxed until 2010, but this will not work for a majority owner if the bonus amount is fixed during 2009 and the business has enough cash on hand to pay the bonus.  The IRS treats the majority owner as being in constructive receipt of the money.

If you place business assets in use by December 31st, you can receive large deductions.  The current tax law allows for bonus depreciation to be claimed for 2009, allowing 50% of an asset’s costs to be deducted up front in 2009.  The other half is recovered through regular depreciation.  The assets covered by this provision have useful lives of 20 years or less, including machinery, equipment, land improvements, single purpose farm buildings and improvements made to the inside of commercial realty.  This tax deduction is not available for other buildings.
Businesses are also allowed to expense assets placed in service before the end of the year.  Firms can expense up to $250,000 of the cost of the assets in lieu of depreciating them.  This is subject to a certain ceiling.

With all of the changes in the laws this year, there are many more planning points than space in this column.  Be sure to talk with your tax attorney or other professional to claim all of the benefits you can this year.

Happy Holidays!