Your Individual Income Taxes

No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies.

• Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.
  
  Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:
  
  • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual for whom the taxpayer may claim a dependency exemption, or
  
  • Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
  
  A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.
  
  Surviving Spouse is a rarely used status for taxpayers whose spouse died in one of the prior two years and who has a dependent child at home. The joint rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year.
  
  
• Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, deductions, exemptions, etc., are limited by a taxpayer's AGI.
  
  
• Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the rate schedule.
  
  
• Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your
  marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.
  
  When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range.
  
  

  2009 MARGINAL TAX RATES
  TAXABLE INCOME BY FILING STATUS
  Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
  10.0%	8,350	11,950	16,700	8,350
  15.0%	33,950	45,500	67,900	33,950
  25.0%	82,250	117,450	137,050	68,525
  28.0%	171,550	190,200	208,850	104,424
  33.0%	372,950	372,950	372,950	186,475
  35.0%	Over 372,950			Over 186,475

  * Also used by taxpayers filing as Surviving Spouse
  
  
  
• Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2009 is $3,650.
  
  Dependents - To qualify as your dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.
  
  Qualified Child - A qualified child is one that meets the following three tests:
  
  (1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences.
  
  (2) Is the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.
  
  (3) The child must be under age 19 or under age 24 in the case of a full-time student.
  
  
• Deductions - Taxpayers can choose between itemizing their deductions or using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2009.
  
  

  Filing Status	Standard Deduction
  Single	$5,700
  Head of Household	$8,350
  Married Filing Jointly	$11,400
  Married Filing Separately	$5,700

  
  
  The standard deduction is increased by multiples of $1,400 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,100. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.
  
  Itemized deductions include:
  
  (1) Medical expenses (limited to those that exceed 71/2% of your AGI for the year);
  
  (2) Taxes consisting primarily of real property taxes, state income tax and personal property taxes;
  
  (3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);
  
  (4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,
  
  (5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;
  
  (6) Casualty losses in excess of 10% of your AGI; and
  
  (7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.
  
  
• Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. An increasing number of taxpayers are being hit with AMT. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, the AMT is not adjusted for inflation, and years of inflation have driven everyone’s income up to the point where more taxpayers are being affected by the AMT. Your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
  
  - Personal and dependent exemptions - are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.
  
  - The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
  
  - Itemized deductions:
  Medical deductions – only allowed in excess of 10% of AGI (71/2% normally).
  Taxes – are not allowed at all for the AMT.
  Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.
  Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT.
  
  - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.
  
  - Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.
  
  - Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.
  
  For years 2001 through 2009, the exemption amounts were temporarily increased. It is not known at this time if they will be increased for 2010 or will revert to the 2000 levels.  The amounts shown are for 2009.
  
  

  AMT EXEMPTION PHASE OUT
  Filing Status	Exemption Amount	Income Where Exemption Is Totally Phased Out
  Married Filing Jointly	$70,950	$433,800
  Married Filing Separate	$35,475	$216,900
  Unmarried	$46,700	$299,300

  
  
  

  AMT TAX RATES
  AMT Taxable Income	Tax Rate
  0 – $175,000 (1)	26%
  Over $175,000 (1)	28%

  
  (1) $87,500 for married taxpayers filing separately
  
  Your tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year and had a state tax refund in that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income.
  
  
• Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.
  
  
  Child Tax Credit - The child tax credit remains at $1,000 per child through 2010. After 2010, without Congressional action, the credit drops to $500. The credit is generally nonrefundable except for certain taxpayers with three or more qualifying dependent children. Through 2010, a credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.
  
  
  Earned Income Credit - This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,100 (for 2009) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.
  
  
  

  2009 PHASE-OUT RANGE
  Number of Children	Joint Return	Others	Maximum Credit
  None	$12,470 - $18,440	$7,470 - $13,440	$457
  1	$21,420 - $40,463	$16,420 - $35,463	$3,043
  2 3	$21,420 - $45,295 $21,420 - $48,279	$16,420 - $40,295 $16,420 - $43,297	$5,028 $5,666

  
  
• Home Energy Credits - There are two distinct categories of home energy credits: (1) Energy-saving improvements (“Residential Energy Property Credit”) to an existing primary residence (allowed in 2009 and 2020), and (2) Energy-producing (“Residential Energy-Efficient Property Credit”) to a primary or second residence (generally allowed through 2016). The credits are non-refundable credits which are not phased out at higher-income levels and are deductible against the Alternative Minimum Tax for 2009. Congress has not specified the AMT implications past 2009. Since the manufacturer will certify the materials that come with their products, the taxpayer does not have to determine whether a home improvement creates or saves energy.
  
  o Residential Energy Property Credit – For energy-savings components installed in or on a taxpayer’s principal residence. The improvement’s original use must commence with the taxpayer and can reasonably be expected to remain in use for at least 5 years.
  
  These include qualified: insulation material or system, exterior windows (including skylights), exterior doors, and metal roofs with appropriate pigmented coatings, asphalt roofing with appropriate cooling granules, hot water boiler and biomass fuel stove. These items qualify for a credit of 30% of their cost, subject to an overall 2-year (2009 and 2010) maximum credit of $1,500.
  
  o Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems.  These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016.
  
  
• Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:
  
  (1) 90% of the current year’s tax liability; or
  
  (2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability.
  
  If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.
  
  Small Trade or Business Sale Harbor – Beginning in 2009, an individual who owns a small business gets a special break.  Provided the individual AGI is less that $500,000 ($250,000 if married filing separately) and at least 50% of the individual AGI is from a small business (defined as having 500 or less employees) the 100% of prior years tax liability safe harbor (item (2) above) is reduced to 90%.

With the sluggish economy, 2009 has not been a great year for most individuals.  Unemployment is up, incomes are lower, retirement savings have declined and many taxpayers are struggling to make ends meet.  The government has provided a variety of tax incentives to help weather the economic storm, and you are urged to take advantage of these special tax benefits as well as other strategies to keep your 2009 tax bite as low as possible.  Note: Some of the strategies below deal with ways to increase a taxpayer’s itemized deductions.  Before acting on those suggestions, read the “Itemize or Standard Deduction” article first.

• State Estimated Tax Payments – Although the deadline to make the 4th quarter 2009 state estimated tax payment is January 15, 2010 for most states, the payment will count as a tax deduction on the federal Schedule A for 2009 if that payment is made before the end of December 2009.

• Property Taxes – Generally, your property taxes are billed in installments, and that’s how most people pay them. However, the tax can be paid all at once, if it provides a greater tax benefit for the current year. 
Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible to the extent a taxpayer is subject to the AMT. Taxpayers subject to the AMT might, instead, consider deferring deductible tax payments to the subsequent year.

• Bunch Deductions - If your tax deductions normally fall short of itemizing your deductions, or even if you are able to itemize but only marginally, you may benefit from using the “bunching” strategy.  For more on this technique, read the article “Bunching Your Deductions Can Provide Big Tax Benefits”.  

• Required Minimum Distributions (RMDs) from Retirement Plans – Except for delayed 2008 distributions, RMDs are not required for 2009.  Congress enacted this one-year relief so individual’s retirement accounts could recover from the market downturn.  However, if you are in a low or zero tax bracket it may be to your benefit to take a withdrawal anyway.  RMDs generally apply to individuals age 70 ½ and older, but even younger retirees who are not yet required to take a distribution may find this strategy beneficial. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of the Social Security income.

• Tax Credit for First Four Years of College - The new American Opportunity Credit (AOC) takes the place of the Hope education credit and provides a credit for tuition and certain other expenses of the first four years of college (Hope only applied to the first two years).  So even if you used the Hope credit in prior years you can qualify for the AOC.   The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.  40% of the credit is refundable which means that taxpayers with little or no tax liability can still benefit from the credit.   Where appropriate, taxpayers can pre-pay the tuition for academic terms starting in the first 3-months of 2010 to help maximize the benefit for 2009.  This credit does begin to phase-out for single taxpayers with AGI above $80,000 ($160,000 for joint filers) and no credit is allowed for taxpayers filing married separate.

• Energy-Efficient Home Improvements – Homeowners who have or will make certain energy-efficient improvements to their existing homes may qualify for energy credits up to 30% of the cost (credit limited to $1,500).  This credit applies to the following qualified energy efficient improvements:  exterior windows and skylights, exterior doors, metal and asphalt roofs, heating systems, air-conditioning systems and insulation.  With many contractors without work this could be an opportune time to negotiate reasonable prices and make those home modifications, but the work must be completed before year-end if you want credit in 2009. 

• Roth IRA Conversions – If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost.

• Prepare for Liberalized 2010 Roth IRA Conversions - Next year will be a pivotal one for retirement planning, as it will be the first year in which taxpayers will be able to convert funds in regular IRAs (as well as qualified retirement plans) to Roth IRAs regardless of their income level.  Read the article “Get Ready for Liberalized IRA-to-Roth-IRA Conversions in 2010” for strategies that can be implemented in 2009 to maximize the amount to be converted.

• Review Estimated Tax Payments and Withholding – Ensure they are sufficient to meet the “safe-harbor” payment amounts so as to avoid underpayment penalties. This is important this year because the Federal Government modified the withholding tables to account for the new “Making Work Pay Credit,” resulting in reduced withholding and possible underpayments, especially in cases where a taxpayer has two jobs or both spouses are employed.  

• IRA and Self-Employed Retirement Plan Contributions – The primary purpose of these plans is to provide for your future retirement and whenever you are eligible and financially able, you should always contribute as much as possible.  Contributions also provide a tax deduction when they are made to Self-employed plans and to most traditional IRAs.  The benefit derived from this tax deduction is based upon your tax bracket.  (Some contributions to traditional IRAs may not be deductible if you also participate in another retirement plan, depending on your income level.)  If 2009 was not a good year financially for you, the deduction may not be significant and you may wish to consider making a Roth IRA contribution instead.   Those individuals who simply prefer the Roth option, but are barred from making Roth contributions because their income exceeds the AGI phase out limitations, might consider making a non-deductible traditional IRA contribution and then converting it to a Roth IRA in 2010 when the Roth IRA AGI limitations are removed.

• Establish a Retirement Plan – If you do not already have a retirement plan and you are considering one, there are several options.  Some, such as Keogh or 401(k) plans, must be set up before the year’s end.   If you are an owner-only business, you should review the article “Owner-Only Businesses Should Consider a Solo 401(k) Plan,” which provides great benefits for business owners with no employees other than their spouse. 

• Capital Loss Carryovers – If you have carryover capital losses remember you can only claim a maximum $3,000 net capital loss on your return and the remainder carries over to the subsequent year.  However, with the market’s recent rally you may have some gains you can take to offset the carryover.  (If you sell at a gain but wish to repurchase stock in the same company, note that the wash sale rules don’t apply—they only apply to losses— so you will not need to wait 30 days to make the repurchase.) For long-term planning, it is important to keep in mind that the current lower capital gains rates of 0% and 15% are only available through 2010.  After that, without Congressional intervention, the rates return to the pre-2003 levels of 10% and 20%.  For more details on this strategy, read the “Fine-Tuning Capital Gains and Losses” article.   

• Non-Cash Charitable Donations – If you itemize your deductions and your garage and closets contain never-used items, you might consider donating those items to charity before year-end to increase your deductions for 2009. To claim a deduction for donated clothing and household goods, they must be in good condition or better, and the donations must be substantiated by a written receipt that includes the name of the charity, dates and location of the donation and a reasonably detailed description of the property donated.   A receipt is not required where the value is less than $250 and it is impractical to obtain one (for example, when items are left at an unattended drop site). If, instead, you decide to sell some of the property, the income is generally tax free provided you sell each item for less than your cost or basis in the property.

• Deduct IRA Losses – If a traditional IRA account that includes non-deductible contributions declines in value and the value of all of your IRA accounts combined is less than the sum of your non-deductible contributions, you can take a loss by withdrawing from (close) all your IRA accounts.  However, this loss is beneficial only if you itemize your deductions and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year.

The foregoing are frequently encountered tax strategies that can be employed by most, but by no means all, taxpayers.  Please call this office if have questions regarding these issue or others or would like to engage in some year-end tax planning.  If you have a substantial increase or decrease in income this year it may be wise to schedule an appointment before the holidays to strategize.  

Most taxpayers have annually had the option to itemize their deductions or take a standard deduction, and the rationale for making the choice has always been rather simple: take the higher of the two amounts.  However for 2009 the choice can be complicated, and in some cases requires advanced planning to maximize the tax benefits of that choice.

The complications have been brought about by the ability, in 2009, to add real property taxes, new vehicle sales and excise taxes, and disaster casualty losses to the standard deduction, creating a hybrid deduction that is part standard and part itemized.  So, the decision becomes more complicated, especially when deciding whether to: buy a new car this year or not; pay all the property taxes or only the first installment this year; and exercise the option to take a 2009 disaster loss in the current year or the preceding year.

Some taxpayers that only marginally itemize each year have adopted the strategy of “bunching” deductions in one year and then claiming the standard deduction in the alternate year. This technique is applied to tax payments, charitable contributions, some medical expenses and to certain business expenses.  Those employing this technique may need to reevaluate their strategy for 2009, take the hybrid standard deduction and defer the other deductible payments into 2010. 

When making the analysis keep in mind: (1) the property tax add-on to the standard deduction is limited to $500 for single taxpayers and $1,000 for married taxpayers filing jointly and (2) the vehicle tax is only allowed for the sales or excise tax paid on the first $49,500 of purchase price for each new vehicle bought after February 16, 2009 and through the end of the year and begins to phase out for single taxpayers with an AGI above $125,000 ($250,000 for married taxpayers). 

If you marginally itemize your deductions it may be appropriate for you to schedule a consultation with this office prior to the holidays, and defer tax deductible payments and buying a car until after we have determined which strategy is best for your particular circumstances.

If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the ‘bunching” strategy.

The tax code allows taxpayers to utilize the standard deduction or itemize their deductions if that provides to be a greater benefit.  As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. 

If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.  

For the most part, itemized deductions include medical expenses, property taxes, state and local income taxes, home mortgage and investment interest, charitable deductions,
unreimbursed job-related expenses and casualty losses.  The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions; although, there are circumstances where the other deductions might be come into play.   There are many opportunities to bunch deductions, and the following are examples of the most commonly used with the “bunching” strategy:

• Medical Expenses – You contract with a dentist for your child’s braces. He may offer you an up-front lump sum payment or a payment plan.  By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year.  If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes.  If you use a credit card, you must realize that the credit card interest is not deductible and you need to determine if incurring the interest is worth the increased tax deduction.  Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 7.5% of your income is actually deductible.  If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible.  So, there is no tax benefit of bunching medical deductions if the total is less than 7.5% (10% if taxed by the AMT).

If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 7.5% (10%) threshold is less.

• Taxes – Property taxes are generally billed annually at mid-year and most locales allow the tax bill to be paid in semi-annual or quarterly installments.  Thus, you have the option of paying it all at once or paying in installments.  This provides the opportunity to bunch the tax payments by paying one semi-annual (or 2 quarterly) installment and a full year’s tax liability in one year and only paying one semi-annual (or 2 quarterly) in the other year.  In doing so, you are able to deduct 1-½ year’s taxes in one year and ½ a year’s taxes in the other. If you are thinking of being late on the property tax payments as means of bunching, you should be cautious.  The late payment penalty will probably wipe out any potential tax savings.

If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction.  So, for instance, if you are making state quarterly estimates, the fourth quarter estimate is generally due in January of the subsequent year.  This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year. 

A word of caution about the itemized deduction for taxes!  Taxes are only deductible for regular tax purposes.  So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes.

• Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion.  For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent years’ tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year.  Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year.

If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing.  

• Dependent Care Benefits - If a taxpayer works and incurs child care expenses, he or she should check to see if their employer has a dependent care program. If the employer does provide dependent care benefits under a qualified plan, the taxpayer may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from his or her wages, which generally provides a greater tax benefit than the child care credit.

• 401(k) or Similar Retirement Plans - If an employer has a 401(k) plan, the employee can elect to defer (pre-tax) a maximum of $16,500 for 2009 and 2010. If age 50 or older, the maximum is increased to $22,000. These plans are especially beneficial when the employer provides a matching contribution.

• Flexible Spending Accounts - Some employers provide flexible spending accounts, which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for medical and dental expenses. If the plan permits, even nonprescription drugs that are not allowed as a medical deduction are covered. However, the participant must use the contributed amounts for the qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year.

• Education Assistance Programs - If you are receiving educational assistance benefits through an educational assistance program provided by your employer, up to $5,250 of those benefits can be excluded from income each year.  This employee benefit will expires after 2010 without Congressional intervention.

• Stock Purchase and Option Plans -
A variety of plans available to employers are designed to allow the employees to invest in the employer’s stock. The most commonly encountered are:

(1) Employee stock ownership plan (ESOP);
(2) Nonqualified stock option; and
(3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO.

• Tax-Free (Income excludable) Employee Fringe Benefits – Provided the employer provides them, the law allows an exclusion from taxable income for the following benefits:

(1) The cost of $50,000 of group term life insurance.
(2) $230 (in 2009 and 2010) per month for qualified parking.
(3) $230 (in 2009* and 2010) per month for transit passes, and commuter transportation.  (* limited to $120 in Jan and Feb of 2009)
(4) $20 per month for bicycle commuting expenses.

If you are helping support your parents, you may be having difficulty showing over half of the support for both, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are a single taxpayer).

You may overcome this problem by designating the support to only one of the parents.  This may allow you to claim at least one of the parents as your dependent and, if you are unmarried, allow you to file as head of household.

To qualify for the head of household filing status, a taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,650 for 2009 and 2010) and receive over half of his or her support from the taxpayer.  The taxpayer himself need not reside in the household he or she maintains for the parents.  The home could even be a retirement home or facility.

To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only.  Otherwise, the support will be designated as a “fund” equally allocated to both.  The IRS suggests a notation on a check as an acceptable designation procedure.  It says, “Notations by the maker on support checks purporting to allocate funds to particular household members made payable to an individual having custody of a claimed dependent, will be regarded as evidence of actual support.”

Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent.  Of course, the agreeing parties must also otherwise qualify to claim the dependent.  Each person who is relinquishing the dependent exemption must complete an IRS Form for attachment to the return claiming the dependent.

If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call.

Although 2009 has been a tumultuous year for most people, there are some positive actions that can be taken to benefit in the current economic conditions.

• Make Gifts - When values are low and expected to rise, the stage is set for making a gift. Under current law, the gift is valued at its fair market value at the date of the gift.  If the value of a planned gift has been depressed by the current market and the value is beginning to recover (rise), this might be the time to make the gift and minimize the gift tax ramifications while reducing your estate for any future estate tax.

If you are helping a loved one weather the current economic downturn, you can give him or her appreciated property, which the recipient can immediately sell for cash.  The result is a transfer of the gain to the person you are helping, who probably will be taxed at a lower tax rate than you are, or possibly will pay no tax at all depending on their circumstances for the year.

For 2009 and 2010, you can gift up to $13,000 of value ($26,000 if married and both spouses make a gift) to as many individuals as you would like without affecting your lifetime gift tax exclusion, paying any gift tax, or even having to file a gift tax return.

• Traditional IRA to Roth IRA Conversions – When one converts a conventional IRA to a Roth IRA, the conversion is taxed at the individual’s marginal tax rate, as if the individual withdrew the funds without being subject to any penalties.  Thus, for 2009, if your taxable income is negative, your marginal tax rate is very low or you have tax credits that are not being fully utilized, it might be appropriate to convert some or all of your traditional IRA funds into a Roth IRA at no or a very small cost.  The benefit is not immediate, but in the future at retirement time, the Roth IRA withdrawals, unlike traditional IRA withdrawals, will be tax-free.

• Use Up Capital Loss Carryovers – If you are one of the lucky investors who has benefited from the recent market upswing and would like to reduce your position in a security or realign your portfolio, and you have unused capital loss carryovers, you might consider selling some of your existing holdings with gains.  By utilizing the unused capital loss carryovers to offset those gains, you may pay little or no tax on the profits.

• Relinquish Dependency Rights – If you are the custodial parent of a child, have the right to claim the child as a dependent, but have no need for the tax benefits associated with the dependency this year, you might consider relinquishing the exemption to the child’s other parent.   Form 8332 is used for this purpose, but be careful to complete it correctly lest you release the exemption for more tax years than intended.

• Exercise Options – Employee stock options, when exercised, produce either ordinary income (non-qualified options) or alternative minimum tax preference income (qualified options) equal to the difference between the exercise price and the market value of the shares at the time of exercise (purchase).  Employees who have stock options with a non-publicly-traded company, where the value is depressed because of the current economic climate but is expected to recover in the near future, should consider exercising their options while the stock value is low.  In doing so, the employees will be able to acquire the stock at a preferential price and hold it for future appreciation with a minimum, or perhaps zero, current tax bite.

• Deduct IRA Losses – A traditional IRA account often contains only contributions that were previously deducted, so if the account’s value declines, no additional loss deduction can be claimed.  However, if you have made nondeductible contributions to a traditional IRA and the value of all of your IRA accounts combined is less than the sum of your nondeductible contributions, you can take a loss — but to do so, you must take withdrawals from (close out) all of your IRA accounts.  The result is a miscellaneous itemized deduction equal to the total of the nondeductible contributions less the sum of the withdrawn amounts.  However, this loss is beneficial only if your deductions are itemized, and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year.

• Cash in Savings Bonds – Two options are available for tax reporting of interest income from certain U.S. savings bonds, such as EE Bonds and I Bonds: include the increase in redemption value each year as interest, or postpone reporting any of the interest until the return for the earlier of the year the bonds mature or are cashed in. Typically, most people choose the latter method.  If you are holding savings bonds that are approaching their maturity and your taxable income for the year will be negative or lower than it normally is, and you haven’t previously reported the interest, you may want to cash in some or all of these bonds to take advantage of your lower tax bracket.  If you don’t want to cash in the bonds, you can make an election to switch to the annual interest reporting method, but if you do so, on the return for the year of the change, you will have to include all of the interest accrued to date for all Series E, EE or I savings bonds that you hold, and then report the annual interest in each succeeding year for those and any bonds of these series that you may acquire in the future.

• Variable Annuity Losses – Variable annuities typically invest in a variety of stock funds, money market accounts, etc.  Since then, the annuity may have declined in value and will be worth less today than its original cost.  If the annuity is sold, the loss can be taken as a miscellaneous itemized deduction. 

The foregoing are examples of some of the many tax strategies that can be employed during depressed economic times to provide both current and future tax benefits.  Please give this office a call if you would like to review your specific circumstances for any year-end or long-range strategies that might apply to you.

Long-term capital gains tax rates will produce automatic tax savings by taxing the gain from capital assets at rates lower than the regular tax rate. To take advantage of the long-term rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset.

• If your marginal rate is 15% or under - Your long-term capital gains rate for 2009* will be 0% for property held longer than one year.

• If your marginal rate is above 15% - Your long-term capital gains rate for 2009* will be 15% for property held longer than one year.

* These rates are in effect through 2010. After 2010 long term capital gains currently taxed at 5% (or zero percent as discussed below) will be taxed at a rate of 10% (8% for assets held over five years), and long-term capital gains now taxed at a rate of 15% will be taxed at a rate of 20% (18% for assets held over five years).

Taxpayers in the 15% or less tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rates in 2008 through 2010, possibly cashing in on existing gains while avoiding any federal tax on the gains. Also remember the gain itself adds to the taxpayer’s income, impacts income-based limitations, and possibly pushes the taxpayer into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate.

Primarily because of this zero tax rate, Congress raised the age for the “kiddie” tax to include full-time students under the age of 25. Thus, Congress effectively nullified a popular strategy for funding college expenses by gifting appreciated stock to children who could then sell it with no or reduced tax liability.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Keep in mind that taxpayers may use up to $3,000 ($1,500 for taxpayers filing as married separate) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI. Currently, individuals are subject to tax at a rate as high as 35% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15%.

All of this means that having long-term capital losses offset long-term capital gains should be avoided, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn't want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.

Special Considerations - Some long-term gains are treated differently. Long-term gain attributable to depreciation recaptured on certain depreciable real estate is taxed at a maximum rate of 25%, and long-term gain attributable to collectibles (works of art, coins, stamps, antiques and similar property) is taxed at a maximum of 28%. If a taxpayer owns shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to his or her benefit to pick the block of shares to sell based on their cost and holding period. If the taxpayer cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes, the mutual fund shares that are sold are considered to be the ones acquired first.

When deciding whether to take gain or hold for long-term rates, compare the savings associated with long-term rates to the financial risk of continuing to hold the investment. Careful handling of capital gains and losses can save substantial amounts of tax. Please contact this office to discuss year-end planning strategies that apply to your particular situation so as to maximize tax savings. Owners of luxury homes with gains exceeding the $250,000/$500,000 exclusion limits, and owners of second homes that do not qualify for the home sale gain exclusion, will especially benefit from the lower capital gain rates.

Dividends

Dividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at no more than 15% for taxpayers whose marginal rate is above 15% and 0%* for those in the 10% and 15% tax brackets. Capital losses cannot offset the dividend income. Dividends on stock held in a retirement plan or Traditional IRA do not benefit from the lower rates; distributions from these plans are taxed at ordinary income rates.

* The 0% rate is effective through 2010.

Deferring or Avoiding Tax When Disposing of Assets

Depending on the type of asset, there are a number of strategies that can be employed to reduce, defer, or even avoid the tax upon the asset’s disposition.

• Tax-Free Exchange - Commonly referred to as a Sec 1031 exchange in reference to the tax code section covering exchanges, this type of strategy is frequently used to defer taxes in real estate held for business or investment purposes by deferring the gain into a replacement real estate property also held for business or investment purposes. Tax-free exchanges are also available for non-real estate business assets, but must conform to stringent like-for-like requirements. Tax-free exchanges do not apply to personal-use real estate holdings, such as your home or second home, and generally do not apply to publicly-traded stock. If the property is mixed-use property, such as a house that is used partially as a home, the business portion may qualify under the Sec 1031 exchange rules. Please call this office for additional details.

• Installment Sale - By carrying back the paper (loan) on the sale of an asset, you can spread the gain over a period of years. In these types of arrangements, the gain and nontaxable return of capital are taxed proportionally over the term of the sale agreement, thereby deferring the tax on the gain portion until actually received.

• Charitable Gift - Consider replacing cash charitable gifts with gifts of appreciated property. By giving the asset to a favorite charity, the taxpayer receives a charitable contribution deduction equal to the fair market value of the gift and at the same time avoids having to report the gain from the asset on his or her return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock a taxpayer is considering gifting is less than what was paid for it, he or she should sell it, take the loss on their return and then contribute the cash to the charity.

• Charitable Remainder Trust - This technique allows a taxpayer to contribute his or her asset(s) to a trust, which in turn pays an income during the remainder of the taxpayer's life and leaves the balance at death to the charity. The assets contributed to the trust can be sold within the trust without any tax consequences to the taxpayer. In addition, when the trust is formed, the taxpayer will receive a charitable deduction for the estimated amount that the trust will leave to charity upon death. The amount of income paid to the taxpayer each year is flexible (within some limitations) and provides annual funds, which can then supplement retirement needs.

• Gifts to Individuals - Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Let’s say that a taxpayer is paying for a child’s college education. Instead of selling some appreciated stock to pay for the schooling, the stock should be gifted to the student, who can sell it in a much lower tax bracket and pay for his or her own school expenses. The foregoing are abbreviated summaries of tax strategies that may have additional restrictions or other tax ramifications. Please consult with this office before attempting to employ any of these strategies.

The foregoing are abbreviated summaries of tax strategies that may have additional restrictions or other tax ramifications. Please consult with this office before attempting to employ any of these strategies.


Take Investment Losses

If a taxpayer has investments that are worth less than what was paid for them, he or she can use the losses to offset other gains and in certain circumstances other types of income.

• Capital Losses - Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, one can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. Any additional losses carry over to future years. For this reason, review your securities portfolio at year’s end and search for stocks and other securities whose sales will result in a capital loss. This will help minimize your gains or maximize your losses for the year. When planning this strategy, keep in mind that under the wash sale rules, a loss is disallowed if the security sold at a loss is repurchased within 30 days. A loss will also be disallowed if the investor buys the same security 30 days before the sale.

Another planning strategy is to avoid having long-term capital losses offset long-term capital gains, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered.

• Variable Annuity Losses - If a taxpayer has a variable annuity that is worth less than what was paid for it, consider surrendering it before year’s end so that a deductible loss can be realized. Usually, the amount that is deductible will be the surrender value less the tax basis in the annuity. The tax basis is generally the amount originally invested less any amounts previously received from the annuity that were excludable from income. Before making a decision to surrender, consider any possible surrender penalties and the potential for the annuity to recover. Please call this office if we can assist you with your decision.

Invest in Tax-Exempt Securities

• Municipal Bonds - Interest received on obligations of states and their municipalities is exempt from Federal tax and may also be free from state taxation. Although these bonds generally pay a lower interest rate, their “after-tax” return (yield) can be higher than other similar investments such as corporate bonds, CDs, etc. Taxpayers in higher tax brackets and children subject to the “kiddie tax” frequently use this investment. Taxpayers drawing Social Security benefits should be reminded that even though municipal bond income may be tax-free, it is still used as income for purposes of determining the taxable portion of Social Security income. In addition, interest on certain “private activity bonds” is not exempt for AMT purposes.

EQUIVALENT TAXABLE YIELD
Tax Exempt	Tax Equivalent Taxable Yield Marginal Tax Rate
10	15	27	30	35	38.6
2.0	2.2	2.4	2.7	2.9	3.1	3.3
2.5	2.8	2.9	3.4	3.6	3.8	4.1
3.0	3.3	3.5	4.1	4.3	4.6	4.9
3.5	3.9	4.1	4.8	5.0	5.4	5.7
4.0	4.4	4.7	5.5	5.7	6.2	6.5
4.5	5.0	5.3	6.2	6.4	6.9	7.3
5.0	5.6	5.9	6.8	7.1	7.7	8.1
5.5	6.1	6.5	7.5	7.9	8.5	9.0
6.0	6.7	7.1	8.2	8.6	9.2	9.8

 

• Direct U.S. Government Obligations - Interest from U.S. Savings Bonds, T-Bills, H Bonds, etc. is taxable only for Federal purposes. Federal law prohibits states from taking a bite out of this income. In addition, interest from U.S. Savings Bonds may be deferred until the year the bond is cashed, providing a vehicle for deferral strategies.

Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period extended military personnel). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.

Effective for home sales after October 22, 2004, if the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable.

Effective for home sales after December 31, 2008, if the home was previously used as a rental, second home, used by a relative, unoccupied, etc and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain.  Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home.  Only home sale portion of the gain qualifies for $250,000/$500,000 gain exclusion.

The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office).

A beneficiary who inherits the residence of a decedent receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term.  Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses.

Year-end has historically been a good time to plan tax savings by carefully structuring capital gains and losses.  Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and where possible, generate the maximum allowable $3,000 capital loss for the year.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. (“Long-term” means that the stock or property has been held over one year.) Keep in mind that taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI.  Individuals are subject to federal income tax at a rate as high as 35% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15%. 

All of this means that having long-term capital losses offset long-term capital gains should be avoided where possible, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn't want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.

However, historical tax-planning logic may not apply this year for the following reasons:

• Increasing Capital Gains Rates - The special long-term capital gains rates that have been in effect since 2003 sunset (end) at the end of 2010 and return to the pre-2003 levels of 10% and 20%! These federal rates are currently 0% for taxpayers in the 15% and lower tax brackets and 15% for those in higher tax brackets. Although only talk up to this point, proposals have been floated  to raise the rate to 20% as early as 2010, plus tack on a 4.5% surtax for the wealthiest taxpayers.  Individuals with large long-term capital gains in their investment portfolios might consider selling those holdings to take their gains now at the lower tax rates.  The good news here is that the wash sale rules do not apply to assets sold at a gain. So if you like a stock, you are free to buy it back right away. If your state doesn’t have a lower tax rate on capital gains, then the additional state tax you’d pay from selling profitable capital assets will need to be weighed against the federal tax you’d potentially save when deciding whether to make tax sales before year-end.

• Raising Marginal Tax Rates – With record deficits, taxes have to go up—campaign promises notwithstanding—and we can expect that to happen in the near future.  The only questions are when, how much, and for whom?  Conventional wisdom has always been to defer income, but with a potential for increased taxes it may be appropriate to consider accelerating income to take advantage of the current lower tax rates.

It may be in your best interest to review you current year tax strategy with an eye to the future to maximize your benefits from gains or losses associated with capital assets.  Please call this office for assistance. 

A frequent tax strategy question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. Therefore, the question is really which provides the greater "after-tax" return.  Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also tax-free for a particular state if the bonds are issued by that state or its local governments. In addition, interest from U.S. Government Bonds cannot be taxed by any state.

The following are issues related to making a decision on taxable or tax-free income:

• Municipal Bond Interest – Interest earned from general purpose obligations of states and local governments, which are issued to finance their operations, are generally tax-exempt for Federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and local governments within the state. Hence, there are two categories of municipal bonds, namely the tax-free Federal and state and the tax-free Federal only. Individuals can invest in municipal bonds by directly purchasing a bond or through funds that invest in municipal bonds. Some funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state’s return.

In general, tax-free bonds are likely to be more attractive for taxpayers in higher brackets, since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit from excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond.

Even though municipal bond interest isn't taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of social security benefits that is taxable, and may affect the alternative minimum tax computation, as well as the earned income credit, investment interest deduction and sales tax deduction.

• Tax-Deferred Retirement Accounts – It generally doesn't make sense to buy and hold municipal bonds in your regular IRA, Keogh, or 401(k) plan account. The income in these accounts is not taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. Thus, if you want to invest your retirement funds in fixed income obligations, it is generally advisable to invest in higher-yielding taxable securities.

• Alternative Minimum Tax Consequences – Even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Your broker can tell you whether the particular bond you are considering is a private activity bond subject to this rule.

The alternative minimum tax is a separate tax system that applies if the tax determined under that system exceeds your regular income tax. Whether or not the alternative minimum tax applies will depend on your overall tax picture; however, in general, the effect of the alternative minimum tax would be to prevent you from achieving too low an effective tax rate by means of tax-favored techniques such as investing in municipal bonds. This office can help you determine how the alternative minimum tax would apply to your situation, and how it would affect the after-tax yield if you were to invest in municipal bonds.

• Effect of Exempt Interest on Taxation of Social Security Benefits – In general, a portion of social security benefits is taxable if your adjusted gross income, subject to certain modifications, exceeds specified amounts. For this purpose, the modifications to adjusted gross income include adding in tax-exempt interest. The effect of this rule is that, if you receive social security benefits, investing in municipal bonds could increase the amount of tax you have to pay with respect to the social security benefit. While technically, the municipal bond interest remains exempt from tax, the effect is the same as though a portion of that interest were taxable.  One technique to solve this problem is to invest in tax-deferred, rather than tax-free, investments.  For instance, income earned by an annuity is not taxable until the annuity is cashed in and thus would not impact the social security taxation except in the year cashed in.  This office can assist you determining impact of tax-free income on the taxability of your Social Security benefits.

• Effect of Exempt Interest on Earned Income Credit – If you are otherwise eligible to take an earned income credit, you will lose the credit completely for 2009 and 2010 if you have more than $3,100 of “disqualified income,” generally, interest, dividend, non-business rental, passive, and capital gain net income. Disqualified income includes tax-exempt income. Thus, municipal bond income could cause loss of the credit. However, in most cases, an individual who is eligible for the earned income credit will be in a low tax bracket, thus making municipal bonds an unattractive investment in view of their lower yield.  Disqualifying income can be avoided by using tax deferred investments as discussed under Social Security Benefits above.

• No Deduction for Interest on Obligations Incurred in Connection with Tax-Exempt Investments – If you borrow money for the purpose of investing in municipal bonds, you can't deduct the interest expense with respect to that borrowing. Moreover, even if the proceeds of borrowing are not directly traceable to tax-exempt investments, interest deductions could be disallowed if the IRS could establish that you continued the borrowing in effect (that is, you didn't pay it off) for the purpose of acquiring or carrying the municipal bonds. If you have otherwise deductible interest and invest in municipal bonds, the result of this rule, by denying a deduction for interest paid, could be effectively to tax the municipal bond interest.

• No Deduction for Investment Expenses Related to Tax-Exempt Investments – If you itemize your deductions, you may deduct the costs of investment advisory, custodial or agency fees, if your total miscellaneous deductions exceed 2% of your income. However, if the investment management services you paid for are connected to the account from which you receive tax-exempt income from municipal bonds or bond funds, the related expenses are not deductible.

• Sale, Call or Redemption of Bond – Normally, the sale, call before maturity, or redemption of a municipal bond is treated the same as a taxable bond. If you held the bond long enough, any gain is taxed at favorable rates. Capital losses can be used to offset other capital gains. Up to $3,000 of any remaining losses can generally be applied against other income, with a carryover of any excess to later years.

• U.S. Government Bond Interest – By Federal law, the interest income of direct obligations of the U.S. Government cannot be taxed by the states (but it is federally-taxed). This includes interest from U.S. Savings Bonds, U.S. Treasury bills, notes, bonds, or other obligations of the United States. Interest earned from the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage (FHLMC) Corporations are not direct obligations of the U.S. Government, and therefore, are not excludable from state taxation unless specifically allowed by state law (generally not the case). If you reside in a state with no state income tax, U.S. Government Bond Interest provides no tax benefit.

• Itemized Deductions – If you do have a state tax and the investment is tax-free in your state, then it also makes a difference whether or not you itemize your deductions on your Federal return. When you do itemize deductions, the state income tax you pay is included as a deduction on your Federal return. Since having state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your Federal tax.

• Municipal Bond Funds – If you are looking for diversity and professional management for your municipal bond holdings, you may want to consider buying shares of a fund that invests in tax-exempt municipal bonds. These funds may be broadly based or targeted to the bonds of a particular state. Dividend municipal bond funds are treated essentially the same as municipal bond interest. To preclude a potential tax loophole, if an investor buys fund shares, receives an exempt-interest dividend, and then sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend.

Use the worksheet below to determine the tax-exempt interest equivalents for your particular tax bracket, state tax (if applicable), and type of tax-exempt in investment. Enter all rates in decimal format. For example, 5.75% would be entered as .0575. Carry all calculated values to at least 4 places after the decimal.

Please call this office if you would to like assistance deciding whether to make a taxable or tax-free investment.  Making the right decision for your particular circumstances can have a significant effect over long periods of time.

• Shifting Income to Your Child - Children under the age of 19 and full-time students under the age of 24 are subject to the so-called kiddie tax. This was enacted by Congress to restrict taxpayers from shifting large amounts of income to their children by taxing the child at the parent’s marginal tax rate. However, for children without earnings from working, there is no kiddie tax on the first $950 (for 2009 and 2010) of investment income, and the next $950 is taxed at 10%. Once the child reaches age 14, all of their income is taxed at their own marginal rate. Once the child’s income reaches the point where it would be taxed at the parent’s rate, additional investments can be made through tax-deferred investment vehicles.

Placing or moving a child's funds into tax deferred or tax free investments such as U.S. Savings Bonds, tax-deferred annuities, municipal bonds, growth stocks, etc. that produce little or no current taxable income, can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for the education expenses.

• Investing in U.S. Savings Bonds - Interest income from U.S. Savings Bonds may be deferred until the bonds are cashed in. Thus, one can defer income for the life of the bonds.

• Investing in Deferred Annuities - Because the interest earned on a deferred annuity is tax-deferred, your earnings are not taxed until withdrawn. This also allows the investment to compound faster.

• Employing Your Child - Payments that you make to your child under the age of 18, who works for you in your trade or business that is a sole proprietorship or partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. As long as the pay is reasonable for the necessary services to the business provided by the child, you can deduct that pay as a business expense. Assuming the child has no other income, he or she will not have any tax on the first $5,700 of wages from you in either 2009 or 2010. Your child may also make deductible contributions to an IRA of the lesser of earned income or $5,000 in 2009 and 2010. These contributions can offset income, so your child could receive $10,700 in gross income by combining the IRA deduction with the standard deduction and pay no tax.

• IRA Contributions - For 2009 or 2010, an individual may contribute the lesser of his or her compensation or $5,000 to their IRA accounts. The spouse can do the same even if he or she does not work, provided the joint compensation is at least $10,000 for the year. For individuals age 50 and over, the annual limit is increased by $1,000. Contributions to a Traditional IRA cannot be made once the taxpayer reaches age 70-1/2. For purposes of determining IRA deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation even if it is the only income they have. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions. Traditional IRA contributions are deductible if the taxpayer and spouse (if married) do not actively participate in another qualified retirement plan or if their AGI is below income phase-out levels. For married taxpayers where one spouse is an active participant in a qualified plan and the other is not, the IRA deduction is phased out when AGI is between $167,000 and $177,000 (up from $166,000 and $176,000  in 2009) for the one who is not an active participant. 

2010 TRADITIONAL IRA PHASE OUT AGI
Phase Out	Single & Head of Household	Joint* & Surviving Spouse	Married Separate
Threshold	$56,000	$89,000	$0
Complete	$66,000	$109,000	$10,000

*When both spouses are active participants in qualified plans.

If you cannot deduct your IRA contribution or you simply wish to generate tax-free retirement funds, you can contribute to a Roth IRA instead of the Traditional IRA, provided the owner’s AGI is below the phase-out levels shown in the table below. Roth IRA distributions are tax-free after a five-year waiting period and the owner has reached age 59-1/2 or becomes disabled.

2010 ROTH IRA PHASE OUT AGI
Phase Out	Single & Head of Household	Joint & Surviving Spouse	Married Separate
Threshold	$105,000	$167,000	$0
Complete	$120,000	$177,000	$10,000

An individual can convert all or any portion of his or her Traditional IRA to a Roth IRA, provided their AGI does not exceed $100,000 in the year of conversion. Since income tax must be paid on the conversion amount, it makes sense to convert if there are many years to go before the individual plans to withdraw the funds. This allows the IRA to accumulate tax-free earnings and appreciation. If an individual has one or more IRA accounts invested in stocks or mutual funds that have declined in value, this might be an opportune time to convert it to a Roth IRA. Another reason to convert to a Roth IRA is to pass on money to your heirs. Unlike a Regular IRA, there are no mandatory withdrawals for the Roth IRA owner, and the heirs will not be liable for income taxes when the Roth IRA is distributed to them.

Beginning in 2010, new legislation: (1) Eliminates the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs, and (2)Permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Under prior law, married taxpayers who filed separate returns were restricted from making conversions.

•  Roth 2010 Rollover Strategies - Looking ahead, there are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA. Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions in the tax years leading up to 2010 and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy. Using the same strategy, even a taxpayer who can make a deductible contribution can elect to make it nondeductible, providing the same result as above.

• Self-Employed Retirement Plans - The maximum deduction for a self-employed individual’s contribution on their own behalf to a profit-sharing or SEP plan for 2009 and 2010 is the lesser of 20% of net self-employment earnings (after the deduction for one-half of self-employment taxes) or $49,000. In addition, a self-employed individual who is age 50 or older can make an additional catch-up contribution of $5,000.

Self-employed individuals are also allowed a 401(k)-style elective deferral of the lesser of the annual maximum ($16,500 in 2009 and 2010) or the net profit from the self-employed business less the profit-sharing or SEP contribution. 

An individual may begin withdrawing, without penalty, from his or her qualified pension plans at the age of 59-1/2. There are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70-1/2, you are required to take distributions(suspended for 2009) from your plans or face a substantial penalty for failing to do so.

• Impact of Your Marginal Rate - If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions could be taken tax-free if age 59-1/2 and over. The penalty only applies to those under 59-1/2.
  
• Impact on Social Security - For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. However, this strategy may not work if IRA distributions are required to be made (see next section).
  
• Minimum Distribution Requirements - The IRS does not allow taxpayers to keep funds in qualified plans indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year the plan owner reaches the age of 70-1/2.
  
  
  

  UNIFORM LIFETIME TABLE
  Age	Life	Age	Life	Age	Life	Age	Life	Age	Life
  70	27.4	80	18.7	90	11.4	100	6.3	110	3.1
  71	26.5	81	17.9	91	10.8	101	5.9	111	2.9
  72	25.6	82	17.1	92	10.2	102	5.5	112	2.6
  73	24.7	83	16.3	93	9.6	103	5.2	113	2.4
  74	23.8	84	15.5	94	9.1	104	4.9	114	2.1
  75	22.9	85	14.8	95	8.6	105	4.5	115	1.9
  76	22.0	86	14.1	96	8.1	106	4.2
  77	21.2	87	13.4	97	7.6	107	3.9
  78	20.3	88	12.7	98	7.1	108	3.7
  79	19.5	89	12.0	99	6.7	109	3.4

Next year will be a pivotal one for retirement planning, as it will be the first year in which taxpayers will be able to convert funds in regular IRAs (as well as qualified retirement plans) to Roth IRAs regardless of their income level. 

This new conversion option poses significant tax planning challenges and opportunities for 2009, 2010 and 2011.   Presently (in 2009), taxpayers with modified adjusted gross income (1) (AGI) in excess of $100,000 may not convert investments in traditional IRAs into investments in Roth IRAs.  This includes converting amounts from SEP-IRAs or SIMPLE IRAs.

There are two big advantages of the Roth IRA: all future earnings and distributions at retirement will be tax free, and the Roth IRAs are not subject to the required minimum distribution rules.  Although conversions are taxable, except for previously non-deductible amounts, they are not subject to the 10% premature distribution tax. 

Big changes coming next year - For tax years beginning after 2009, the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will be able to convert amounts in a traditional IRA into a Roth IRA (currently they are barred from doing so).

There are other tax advantages: Because distributions from Roth IRAs are tax-free (if they are qualified distributions), they may keep a taxpayer from being taxed in a higher tax bracket than would otherwise apply if he were withdrawing taxable distributions, don't enter into the calculation of tax owed on Social Security payments, and have no effect on AGI-based deductions. What is more, the benefits flow through to beneficiaries of Roth IRA accounts, who also can make tax-free withdrawals from such accounts (they are, however, subject to the same annual post-death minimum distribution rules that apply to beneficiaries of regular IRAs).

Should you make an IRA-to-Roth IRA conversion? Generally taxpayers with the following tax profiles should consider making a conversion:

• Taxpayers that still have a number of years to go before retirement and time to recoup the conversion tax dollars;  

• Are in a lower than normal tax bracket in the year of conversion;

• Anticipate being taxed in a higher bracket in the future; and

• Can pay the tax on the conversion from funds other than non-taxed retirement funds.

Complicating factor for 2010 conversions - A unique income inclusion rule will apply for IRA-to-Roth-IRA conversions occurring in 2010. Unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012. This requires some careful planning since, without Congressional action, the current lower tax brackets of 35%, 33%, 28%, and 25% will revert to their pre-2001 levels of 39.6%, 36%, 31%, and 28% after 2010. 

What do to this year. Taxpayers who intend to take advantage of the new conversion option next year should consider the following strategies:

• Non-high-income taxpayers who are able to make deductible IRA contributions this year should do so. They'll reduce their 2009 tax bill and, if they make the conversion to a Roth IRA next year, they won't have to pay back the tax savings until 2011 and 2012.

• High-income taxpayers should consider making nondeductible IRA contributions this year. They can then roll over the accounts into Roth IRAs next year at no tax cost.

• High-income taxpayers planning to make large conversions in 2010 and pay the tax in 2010 rather than deferring the tax until 2011 and 2012 should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income.  Instead they should consider doing the reverse, accelerating income into 2009 and deferring deductions until 2010 to help reduce the conversion tax in 2010.

Conversions can be tricky!  So if you are considering a conversion in 2010 it might be appropriate to call for an appointment so we can help you properly analyze your conversion options.

(1) With respect to conversions to Roth IRAs, the AGI is modified by eliminating a number of income exclusions, but does not include the income resulting from the conversion itself, nor does it include any Required Minimum Distributions.

Congress, in recent years, has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits.

• Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2009 and 2010, you can contribute $13,000 ($26,000 for married couples who agree to split their gift) a year without gift tax implications. The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing to prepay five years of gifts up front without gift tax.

• Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out between $190,000 and $220,000 for married taxpayers filing jointly and between $95,000 and $110,000 for all others.

• Education Tax Credits - Two tax credits are available in 2009 and 2010, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education for a taxpayer, spouse and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns.

The American Opportunity Credit is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 35% of the next $2,000 for a student attending college on at least a half-time basis. 40% of the American Opportunity credit is refundable (if the tax liability is reduced to zero). The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to the postsecondary education allowed for the American Opportunity and Hope Credit (not available in 2009 and 2010), the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. Qualifying expenses for these credits is generally limited to tuition. Qualifying expenses for these credits is generally limited to tuition. However, student activity fees and fees for course-related books, supplies and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition.

If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer.

• Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses. For 2009 and 2010, this deduction phases out for married taxpayers with an AGI between $120,000 and $150,000 and for unmarried taxpayers between $60,000 and $75,000. This deduction is not allowed for taxpayers who file married separate returns.

Real estate rental income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. An exception allows most individuals to annually deduct up to $25,000 ($12,500 for married filing separate taxpayers who live apart the entire tax year) of real estate rental losses. This dollar limit phases out ratably at AGI between $100,000 and $150,000 ($50,000 and $75,000 for married filing separate taxpayers who live apart the entire tax year). Any unallowed passive loss will carry over to future years. If you qualify as a real estate professional, the passive loss limitations will not apply to your real estate rental activities.

Non-tax considerations generally take precedence in selecting the appropriate structure for your business. However, tax considerations can also play an important role in your decision. Choosing the right business entity at the inception of your business is important, and all aspects should be carefully considered.

• Business Entity Choices - Your choices of business entities include: Corporation, Sub-S Corporation, Partnership, and Limited Liability Company; if there are no co-owners, one can choose a Sole Proprietorship.

HOW BUSINESS ENTITIES ARE TAXED
	To The Business	To The Owner(s)
Sole Proprietorship	No	Yes
Partnership	No	Yes
Corporation	Yes	Dividends
S-Corporation	No (2)	Yes
Limited Liability Co.	Depends Upon Structure

(2) Exceptions apply

• Business Start-Up Costs - A frequent question is how the start-up costs of a business are handled before actually in business. Typical expenses include legal consultation, travel, surveys, establishment of suppliers, employee training, etc. Current law allows a taxpayer to deduct up to $5,000 of start-up costs in the year the business begins; a partnership or corporation may expense up to $5,000 of organizational costs. Each $5,000 amount must be reduced, but not below zero, by the amount of accumulated start-up expenses and organizational costs in excess of $50,000. If not deductible in the year the business begins, these expenses are deducted ratably over 15 years.

• Purchasing an Ongoing Business - If you are considering purchasing an ongoing business that is not a stock transaction, it is important that you and the seller agree on how the purchase price is allocated among the various elements of the business. The allocation can have significant tax ramifications for both the buyer and seller, and the IRS requires the treatment between the buyer and seller to be consistent. Some elements can be depreciated or written off quicker than others, while some cannot be written off at all. For the seller, the sales prices of some elements receive capital gains treatment, while others generate ordinary income. When negotiating the sale, be sure it includes the agreed allocation.

• Deducting the Cost of Business Assets - Depreciation is a way of recovering the cost of an item purchased for business use over a period of time. Some assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others, accelerated methods that front-load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use.

SAMPLE DEPRECIABLE LIVES
Asset	Depreciable Life
Agricultural Equipment	7 Yrs
Automobiles (3)	5 Yrs
Commercial Real Estate	39 Yrs
Land	Not Depreciable
Land Improvements	15 Yrs
Office Equipment	5 Yrs
Office Furnishings	7 Yrs
Residential Real Estate	27.5 Yrs
Trucks (3)	5 Yrs

(3) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions.

For 2009, you may also elect to expense up to $250,000(4) of the cost of certain assets (generally those with a depreciable life of seven years or less) the first year the asset is placed in business service (Sec 179 deduction). The deduction is limited to the income from all of the taxpayer’s trades and businesses. There are additional restrictions if more than $800,000 of assets are placed in service during the tax year.   The expense amount for 2010 is currently set to drop to $134,000 without Congressional intervention.

The Sec 179 deduction for SUVs is limited to $25,000 and applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less.

Excluded from this limitation is any vehicle that:

- is designed for more than nine individuals in seating rearward of the driver's seat;

- is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or

- has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

(4) Taxpayers filing married separate are only allowed $66,500. The expense limit is increased to $168,000 in qualified enterprise zones.

• Special Breaks for Incorporated Businesses - If a business is incorporated, there are two special tax provisions that may apply. You may want to qualify the stock as “Small Business Stock.” When stock of this type is sold or exchanged, losses up to $50,000 ($100,000 if married filing jointly) per year may be deducted as an ordinary loss instead of a capital loss, which would be limited to your capital gains plus $3,000 ($1,500 if filing as married separate).

If the business is a C-Corporation and you acquired the stock at original issue, you may also qualify for a 50% or 75% exclusion of gain for certain small business stock held for more than five years. Or, you may choose to roll over the gain from qualified small business stock held for more than six months by buying another small business stock within six months.

• Business Automobiles - When a vehicle is used for business purposes, the taxpayer can deduct the business portion of the operating expenses on the business. If the car is used for both business and personal purposes, you may deduct only the cost of its business use. One can generally determine the expense for the business use of the car in one of two ways: the standard mileage rate method or the actual expense method.

- Standard Mileage Rate Method—The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. Beginning in January 2009, the standard mileage rate is 55.0 cents per mile. In addition, the cost of business-related parking and tolls is deductible. Note: Because of the volatility of fuel prices, the mileage rates may vary during the year.

Caution: If the standard mileage rate is not used in the first year the vehicle is placed in service, it cannot be used in future years. If, in a subsequent year, the taxpayer switches to the actual method, the straight-line method for depreciation must be used. If the car is leased, continue to use the standard mileage rate in future years. The standard mileage rate can be used for up to four vehicles that are being used simultaneously in business.

- Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible.

Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The auto depreciation limit for 2007 is $2,960 (note: this value is annually adjusted an is expected to be about the same for 2010). An additional $100 allowance is added to the above limitations for certain passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs).

In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

• Self-Employed Health Insurance Deduction - Self-employed individuals may deduct, as an adjustment to income, 100% of health insurance expenses paid for themselves and their families. Don’t overlook as eligible amounts for self-employed individuals both long-term care insurance premiums, up to the annual age-based limits, and Medicare-B and -D premium payments.

• Home-Based Businesses Can Deduct Office-In-The Home -

- The Home - Deducting a home office gives rise to several issues:

(1) the qualifications that must be met to take that deduction;

(2) expenses that can be deducted; and

(3) the tax implications when the home containing the home office is sold).

- Qualifications for the Deduction - Generally, a home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. For home-based businesses, the home office qualifies as a principal place of business if the office is used on an exclusive and regular basis for administrative or management activities of any trade or business of the taxpayer, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.

- Home Office Expenses - Home office expenses are divided into two categories: those that are directly related to the office, such as painting the room, installing a phone, etc., and indirect expenses that relate to both the office and personal portions of the home, such as utilities, insurance, real estate taxes, home mortgage interest, repairs benefiting the entire home and depreciation if the home is owned or rent if the home is rented. The expenses for the business use of a home cannot exceed the income from the business requiring the office.

- Acquire Equipment - If you wish to reduce your profits, consider purchasing some additional equipment or machinery needed for the business. This will allow you to take advantage of the depreciation and expensing deductions.

- Establish A Retirement Plan - If you don’t have a retirement plan established, this might be the time to consider one. There are a variety of plans available, including Keogh Defined Contribution and Profit Sharing Plans, which must be established before the end of the year, or a SEP Plan, which can be established after the end of the year.

- Reduce Inventory - The cost of goods is a deduction against business income. However, any inventory remaining at the conclusion of the business year will be used to reduce your cost of goods sold, and thereby increase your profits for the year. You may wish to minimize the inventory before the end of the business year.

- Domestic Production Deduction - For 2009, the domestic production deduction for both corporations and individual business owners is 6% (increases to 9% in 2010). The deduction is 6% of the lesser of the individual taxpayer's:

(1) Qualified production activities income for the year, or

(2) Adjusted gross income* for the year determined without regard to this deduction (but limited for any year to 50% of the W-2 wages paid by the taxpayer as an employer) during the tax year. So, for example, a sole proprietor who has no employees would not be eligible for this deduction. The main beneficiaries of this deduction are businesses that produce goods, develop software or construct property in the U.S.

*Substitute "taxable income" in lieu of adjusted gross income for other than individuals.

Example - Computing Domestic Production Deduction: Linda actively conducts a business as a sole proprietor manufacturing and selling ceramic dishware, all in the United States. She has two employees. Linda's qualified production activities income (QPAI) for 2009 is $55,000, which is the same amount as her net earnings from self-employment. The W-2s she filed for the employees show qualifying wages of $80,000. Linda's AGI before the Section 199 deduction is $45,000. Her Section 199 deduction will be $2,700. The applicable percentage for 2009 is 6%; the lesser of QPAI or AGI is AGI of $45,000. 6% x $45,000 = $2,700. Since 50% of W-2 wages (50% x $80,000 = $40,000) is greater than $2,700, the deduction is not limited by the W-2 wage element, and the deduction will be $2,700.

It goes by many names; Solo 401(k), Mini 401(k) and single-participant 401(k).  We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses.  It provides for larger contributions, including a Roth option for a portion of the contribution and the ability to borrow funds from the plan at reasonable rates.  As a result, Solo 401(k) plans have become more attractive options than SEP-IRAs, Simple IRAs or profit-sharing or money purchase plans.  In addition, if the plan permits and most do, assets for other retirement plans can be rolled over into the Solo 401(k) plan.  

Generally, Solo 401(k) plans are a natural fit for two categories of businesses.  The first includes independent contractors, sole proprietors, and owner-only C or S corporations. The second is those who have dual incomes.  They are W-2 wage earners as employees of a company that offers a 401(k) plan who also have consulting income from corporate directorships or freelance work that requires them to file a schedule C as a sole proprietor.  Since the 401(k) contribution limits apply to each individual for the year and not the individual plans, if the taxpayer has multiple 401(k) plans, he or she needs to make sure that not more than the annual limit is contributed to the combination of plans.

For 2009, the rules limit employer contribution (profit-sharing contribution) to 25% of compensation.  The employee can also make salary deferral contributions up to $16,500.  Together, these contributions cannot exceed the lesser of $49,000 or 100% of compensation.  In addition, if the employee is age 50 or over he or she can make an additional catch-up contribution of $5,500. 

Example – Susan Lewis, age 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2009. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 x .25), $14,500 (11,500 plus 3% of $100,000) to a Simple IRA and $25,000 to a profit-sharing or money purchase plan.  However, she can contribute $41,500 to a Solo 401(k) plan ($25,000 employer contribution plus $16,500 employee deferral) still under the $49,000 maximum for the year. If Susan were age 50 or over, she could also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $47,000.  

Note: Generally, 401(k) plan contributions for an unincorporated business will be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions.

In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts.  For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions.

Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business’s only other employee.  Having the spouse on the payroll gives the business owner the opportunity to shelter some or all of his or her income by having the spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution.  Although the spouse and the business would be responsible for their respective share of employment taxes on the salary, combined employer and employee contributions can be up to the lesser of $49,000 (for 2009) or 100% of compensation. This limit applies separately to the business-owner and spouse, thus allowing a combined total of up to $98,000 (for 2009).  In addition, if age 50 or over, each individual could defer an additional $5,500 each year.

Potential downside - If a business grows and begins hiring employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other more stringent rules including discrimination testing that can serve to limit contributions by highly-paid executives.  Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements.  Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k).

For additional information regarding Solo 401(k) plans and how it might fit into your tax strategy and retirement planning, please give this office a call.  If you are considering a Solo 401(k) plan for 2009, be aware that the plan must be set up before year’s end.

Increased business spending for durable goods and capital items indicates that businesses are beginning to loosen their purse strings. From a tax standpoint, this is also a good time to consider capital purchases, thanks to some extraordinary tax benefits available through the end of the year.   If your business is considering expansion or capital purchases, now may be the time to act—because without Congressional action, which is unlikely due to increasing federal budget woes, the following business benefits will no longer be available after the close of 2009.

• Bonus Depreciation - Under the first-year bonus depreciation rules, taxpayers may generally claim an additional first-year depreciation deduction equal to 50% of the cost of qualified property placed in service in 2009. This bonus depreciation deduction is allowed for both regular tax and AMT purposes.  Qualified property includes equipment and machinery that is purchased new and placed into service before the end of the year.

• Luxury Auto Limitations - Generally, vehicles weighing 6,000 pounds or less are classified as luxury vehicles, and the first-year depreciation is 20% of the cost of the vehicle but limited to a maximum of $2,960 ($3,060 for light trucks), regardless of the cost of the vehicle. However, for 2009, and at the taxpayer’s election, that maximum is increased to $10,960 ($11,060 for light trucks).  This increase is attributable to the bonus depreciation allowable for 2009.

• Enhanced Expensing (Sec. 179) - For equipment and machinery placed in service in 2009, the maximum expensing allowance is $250,000; it phases out when the cost of eligible property placed in service during the year exceeds $800,000.  Barring any change by Congress, the $250,000 and $800,000 amounts will reduce to $125,000 and $500,000 in 2010, and drastically decline to $25,000 and $200,000 in 2011.

• Quick Write-Offs for Most New Farming Machinery and Equipment - Those engaged in a farming business have the opportunity to depreciate qualifying new farming machinery and equipment over a 5-year period, instead of over the generally-applicable 7 years.  To qualify, the original use of the property must have begun with the taxpayer after December 31, 2008, and before January 1, 2010. Grain bins, cotton ginning assets, and fences or other land improvements aren’t eligible for the 5-year write-off period. 

Generally, farming machinery and equipment also qualifies for the increased expensing and bonus depreciation deductions previously discussed, providing extraordinarily large tax write-offs for 2009.

• 15-Year Write-Off for Leasehold Improvements - Qualified leasehold improvements, restaurant improvements, and retail improvements completed and placed into service before January 1, 2010 may be written off over 15 years instead of the usual 39 years. This more than doubles the annual write-off for these improvements.

The options for writing off capital expenditures in 2009 make it possible to customize the write-off for virtually all businesses through careful pre-year-end planning.  So whether you wish merely to optimize the write-off for capital purchases already made, or you wish to plan additional purchases to take advantage of the special 2009 tax write-offs, give this office a call.  Together we can strategize to maximize your benefits and minimize your tax liability.  

As you plan for your tax year, keep in mind that some tax deductions are “above-the-line” and are available whether deductions are itemized or not. In addition to the educational “above-the-line” deductions mentioned earlier, the following deductions are noteworthy.

• Hybrid Vehicle Tax Incentives - Purchasing a hybrid vehicle can provide you with a tax credit ranging from $250 to $3,400.
This tax credit directly offsets the regular income tax. For 2009, the credit offsets the Alternative Minimum Tax (AMT).  Each manufacturer is limited to producing 60,000 vehicles on which these credits are available. Thus, before purchasing a hybrid vehicle, verify the amount of credit available for the vehicle being purchased, and
make sure the credit is not limited because the manufacturer has exceeded the 60,000 car limit.

(Note: Toyota, Lexus and Honda have already exceeded the 60,000 car limit and therefore no credit will be available for those vehicles.  Ford has also reached the 60,000 car limit and will no longer qualify for credit after March 31, 2009.)

Additionally, one should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period the vehicle is expected to be driven.

• Health Savings Accounts - A Health Savings Account is a trust account into which tax-deductible contributions may be made by qualified taxpayers who have high deductible medical insurance plans. Interest earned on the HSA balance is tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by the medical insurance for an eligible individual. If these funds are not used, they roll over year to year. Once the taxpayer turns 65, the funds can be used as a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize deductions to take advantage of this new tax break. High deductible plans are defined as those with the following deductible amounts for 2010: Self-only coverage with an annual deductible of $1,200 (up from $1,150 in 2009) or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $5,950 (up from $5,800 in 2009); or Family coverage with an annual deductible of $2,400 (up from $2,300 in 2009) or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $11,900 (up from 11,800 in 2009).

• Teacher's Expenses - Educators who work in a school (grades K-12) for at least 900 hours during a school year are allowed a deduction of up to $250 for their qualified expenses. Qualified expenses generally include books, supplies, computer equipment, and supplemental classroom materials. Qualified educators include teachers, instructors, counselors, principals, and aides.  This deduction expires after 2009 unless extended by Congress.

• Itemized Deductions - If a taxpayer's itemized deductions exceed the standard deduction, he or she will want to itemize their deductions. Itemized deductions consist of five basic categories, each with its own limitations and special considerations.  The high-income phase-out expires after 2009 barring any intervention by Congress. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. The following is an overview of the itemized deductions

• Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for the taxpayer, his or her spouse and dependents that exceed 7-1/2% of the taxpayer's AGI for the year.

For AMT purposes, your medical deduction will be less because only the excess of unreimbursed expenses above 10% of your AGI is deductible. Those expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through a cafeteria plan) cannot be included. Some new or less common deductions include the following:

- The cost of a weight loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician.

- Medicare-B premium payments and the new Medicare-D premiums for drug coverage.

- Participation in smoking-cessation programs and for prescribed drugs (but not nonprescription items such as gum or patches) designed to alleviate nicotine withdrawal.

- Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. Long-term care insurance premiums are deductible, but with an additional limitation on the allowed amount based on the taxpayer’s age.

- Medical dependent - For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling the taxpayer to deduct the individual’s medical expenses that the taxpayer paid.

A child of divorced parents is considered a dependent of both parents (so that each parent may deduct the medical expenses he or she pays for the child.)

2010 Long-Term Care Insurance Deduction Limit Based On Age
Age	40 or less	41 to 50	51 to 60	61 to 70	71 & Older
Limit	$330	$620	$1,220	$3,290	$4,110

Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible.

• Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes and personal property taxes. In addition, a temporary provision through 2009 allows taxpayers to choose between deducting state income tax or sales tax, whichever provides them the best benefit. To determine the deductible amount, taxpayers may use their total sales tax for the year backed up with receipts or use the amount pre-determined by the IRS for their income plus the sales tax for motor vehicles and boats. Those that live in states with no state income tax simply benefit from the additional deduction for the year. Non-itemizers may also find that the addition of the sales tax deduction might allow them to itemize. Planning tip: Since taxes are not deductible for AMT purposes, taxpayers should attempt to minimize the payment of taxes in a year they are subject to the AMT if they can avoid late payment penalties. Where property taxes were paid on unimproved and unproductive real estate, a taxpayer can annually elect to capitalize the taxes in lieu of deducting them.
 
• Interest - The only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on the taxpayer’s main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt.

Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, the taxpayer should attach a statement to their return (timely filed) for the year the election is to be effective stating the election is to apply.

Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. A taxpayer can elect to treat capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains are then not eligible for the lower capital gains tax rate. Qualified dividends taxed at the reduced capital gains tax rates are not treated as investment income for the investment interest deduction calculation.

• Charitable Contributions - A taxpayer may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent he or she receives no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are no longer deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), a taxpayer is generally required to have a qualified appraisal of the property donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of the taxpayer’s Adjusted Gross Income. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property.

Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership.

Congress has imposed some tough rules that will substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to the new rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information.

• Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of a taxpayer's AGI and those that are not.

- Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses.

- Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 ($500 for 2009) and the total loss for the year by 10% of your AGI), repayments of income over $3,000) reported in prior years and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to a portion of the estate tax paid.

With changes just about every year, our tax laws have become very complex. The information and strategies included in this book are overviews intended to increase your awareness of issues that might apply to you and your annual tax planning. Before implementing any of the ideas or strategies discussed, you are encouraged to call this office.We will be happy to assist you.

DISCLAIMER

The purpose of this guide is to provide current information on tax, financial, and business developments and to suggest general tax planning ideas that may be appropriate in certain situations. The information and opinions are generalizations and may not apply to all taxpayers. It is important that you seek appropriate professional advice before implementing any of the tax strategies suggested.