Your Year-End Tax Guide
Taxes tend to take center stage in April, but planning for tax day should start as the end of the year approaches. And with 2009’s unique stimulus programs and new deductions – many of which require action before the end of the year – it’s important to start getting your taxes in shape well before New Year’s Eve. See our guide below to learn about some of the biggest tax incentives that can benefit you this year.
Health Savings Accounts (HSA)
How much? The maximum HSA contribution increases to $3,000 ($5,950 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $1,000.
Deadline: Dec. 31, 2009
The rules: For 2009, the minimum annual deductible of a high-deductible health plan increases to $1,150 ($2,300 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,800 ($11,600 for family coverage). The maximum HSA contribution increases to $3,000 ($5,950 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $1,000. For more information: See our “Ask a Banker” question on the back cover, or visit www.irs.gov .
How much? First $2,400 in unemployment compensation is tax-free. An extra $25 per week is also available.
Deadline: Must have lost job before Dec. 31, 2009The rules:
In 2009, the first $2,400 in unemployment benefits is not taxable and you can receive an extra $25 per week in unemployment checks. Also, the stimulus provides a subsidy that covers 65% of the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation premiums for up to nine months after you lose your job. For more information:www.dol.gov or www.irs.gov/individuals.
First Time Home Buyers Credit
How much? $8,000 tax credit.
Deadline: Dec. 1, 2009
The rules: The first-time homebuyer credit provides a tax credit of up to $8,000 for anyone thinking of purchasing a new home. And you don’t have to pay this money back as long as you live in your home for three years. A nice benefit of the first-time homebuyer credit is you won’t have to wait until April to get the $8,000 refund if you claim the credit for a 2009 purchase on an amended 2008 tax return. For more information: www.irs.gov/individuals
New Car Sales Tax Deduction
How much? Amount of sales tax for the first $49,500 purchase price of a new car.
Deadline: Jan. 1, 2010
The rules: In the past, you were not allowed to deduct sales tax on the purchase of automobiles. However, this year’s sales tax will be deductible for individuals who make less than $125,000 if single or $250,000 on a joint return. “So if a taxpayer was looking to buy a new car in 2010, purchasing the car in 2009 could allow the taxpayer to deduct the sales tax paid on that vehicle purchase,” says Jeff Hackney, Partner, Tax Department, for accounting firm Crowe Horwath. For more information: www.irs.gov/individuals .
Gift Tax Exclusions
How much? $13,000 for individuals, $26,000 for married couples.
Deadline: Dec. 31, 2009
The rules: You can give up to $13,000 tax free to any number of individuals and $26,000 if you are married and the gift is from you and your spouse. For more information: www.irs.gov
Home Improvement Credits
How much? Up to $1,500.
Deadline: Dec. 31, 2010
The rules: Consumers who purchase and install specific products – such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes – can receive a tax credit for 30% of the cost, up to $1,500, for improvements placed in service starting Jan. 1, 2009 through Dec. 31, 2010. For more information: www.energy.gov/taxbreaks.htm
Home Equity Line of Credit
How much? Cost of interest is tax free for debts under $100,000.
Deadline: Dec. 31, 2009
The rules: For people with substantial credit card debt, refinancing this debt into a home-equity line of credit before the end of the year is beneficial. “The interest you pay on your home equity is going to be fully deductible up to the home equity debt limit of $100,000 as opposed to the interest that you pay on credit cards, which is not deductible at all,” Hackney says. “So not only would you reduce the interest rate from a rate near 21% to something substantially less that, you also convert the interest into tax-deductible payments.” The only stipulation with this program is that the home equity debt must stay below $100,000. And Hackney says it’s also essential that people stay disciplined and make more than just their minimum payment after they consolidate. For more information: www.irs.gov
Analyze Your Current Situation
When analyzing 2009 tax incentives, Hackney says it’s important to think about your current and future income levels. “One of the first steps that individuals need to take when they start talking about year-end tax planning is estimate what their current income is going to be and their current level of deductions for the year,” Hackney says.
This analysis, along with looking at projected income and deductions in 2010, determines the next steps in your tax-planning future. For example, if you’re going to make more money in 2010 than in 2009, you’ll want to try to postpone some deductions until 2010, he adds.
Overall, combining this approach with 2009’s unique tax incentives can save you a significant amount in taxes paid in 2010. The total savings you can expect depends on your tax bracket, says Hackney. For example, if you are married, filing a joint return and have taxable income of $100,000, you are in the 25% tax bracket, he says. If you decide to make a contribution of an additional $100 to your favorite charity, you save $25 off your tax bill with the IRS. So in effect, that donation really only costs you $75.
“It’s really important to look at the current year versus the following year,” Hackney advises. “Let’s say you’re at the 35% bracket this year because you had large gains, but you know you’re only going to be in the 25% bracket next year – it pays to do some of those accelerations of deductions if you can, whether it’s contributions or interest payments or possibly, medical benefits to get the tax benefit in the current year at the higher rate.”
Hackney also advises anyone looking at any kind of tax savings to discuss their situation with an advisor to achieve maximum tax benefits. “It’s especially important to talk about the potential of the alternative minimum tax,” he says. “This is somewhat of a stealth tax that people sometimes aren’t aware of, and that can really jump up and create a situation where you might make an advance payment of state income or real estate taxes and receive no tax benefit for it at all.”
Hackney reiterates to clients that before trying to take advantage of these strategies, a fundamental understanding of your income and tax situation for 2009 and 2010 is necessary. But the opportunities are definitely out there before the end of the year. “I know there’s a lot [that is] new this year,” he says. “But in this situation with this tough economy and people having lost jobs, there could be some real incentives available for folks depending on their income.”