Year-end tax planning tip #3 - Expiring Provisions

On December 31, 2009, several tax deductions and credits will expire under current tax law. As with any tax law, these could be extended at the last minute. Even so, it pays to know what they are and have the option to take advantage of them before they disappear. Here are a few of the most popular provisions:

1. $250,000 Section 179 expensing limit for purchases of machinery, equipment, and certain vehicle for use in your business will decrease. This expensing option will not expire at 12/31/2009, but the limit will decrease to $125,000 for years beginning after that date. You might be able to increase your immediate expensing amount by making major purchases and putting the assets into service before 12/31/2009.
2. 50% bonus depreciation will expire on 12/31/09. You will want to coordinate this deduction with the Sec 179 deduction to maximize its effect on your tax bill. Unlike the Section 179 option, though, this one completely disappears so you definitely need to move quickly to take advantage of it.
   
3. The above-the-line tuition deduction of up to $4,000 will expire on 12/31/09. If your adjusted gross income is less than $80,000 for single filers or $160,000 for joint filers, then you might benefit from paying college tuition for the Spring 2010 semester before 12/31/09. Tax credits for tuition payments will still be available after 12/31/09, so not everyone will be better off by pre-paying. Careful planning needs to take place to maximize your tax impact.
4. The option to deduct sales tax instead of state and local income tax expires on 12/31/09.
5. The special allowance to deduct sales tax paid on the purchase of a new vehicle only applies to purchase made on or before 12/31/09.

Feel free to contact me to discuss any of these provisions and how they might impact your personal tax situation.

Year-end planning article links

In addition to my personal year-end tax planning, tips, I will update this post with links to articles from other professionals:

http://www.brookfieldnow.com/userstoriessubmitted/78766167.html
http://www.webcpa.com/ato_issues/2009_17/-51781-1.html
http://www.businessweek.com/smallbiz/content/nov2009/sb2009115_957502.htm
http://newsblogs.chicagotribune.com/marksjarvis_on_money/2009/12/use-december-to-cut-2009-taxes.html
http://www.smartmoney.com/personal-finance/taxes/year-end-tax-planning-strategies-for-individuals/

Year-end tax planning tip #2 - Sell Investments to Take Losses

If you have investments such as stocks, mutual funds, or bonds that are currently trading for less than you originally paid for them, then it might be beneficial to sell those investments before the end of the year so you can deduct the losses on your 2009 tax return. If you are considering this, then please be aware of the following:

• Selling these investments at a loss creates a capital loss which is only deductible against capital gains. A special rule does allow up to $3000 of capital loss to be deducted against other income such as wages, interest, and business income, though. So even if you have no capital gains this year, capital losses can still provide a small amount of tax benefit.
  
• If your capital losses exceeds your capital gains by more than $3000, then the excess loss is carried forward and can be used in later tax years.
• If you sell an investment holding at a loss and buy back the same holding within 30 days of the loss sale, then the loss will be disallowed under the "wash rule." The "wash rule" applies even if the loss sale occurs in December 2009 and the subsequent purchase of the same holding occurs in January 2010. There is no "reset" at the end of the year. If you wait 31 days to buy back the holding, then the wash rule does not apply.

As with any tax planning technique, though, don't let tax law be the only factor that influences your decision. Educate yourself about the non-tax consequences of this strategy with your investment advisor or other professional to be certain selling investments at a loss fits into your overall financial plan.

What tax changes to expect in 2010 and 2011

It's always difficult to try and predict the future with any certainty, but Dean Zerbe, a tax credit specialist with AlliantGroup, tries to do so in his recent Forbes article. Mr. Zerbe makes some good points and I think has some good advice for anyone who would like a basic framework for tax planning during this transition period.

The reason for the transition period and so much uncertainty in the next 2 years is because the Bush tax cuts passed in 2001 are about to sunset and Congress has not yet passed permanent or temporary extenders for these laws.

Year-end tax planning tip #1 - Energy Saving Home Improvements

Don't forget that a tax credit worth up to $1500 is available if you make certain energy-saving home improvements before the end of the year. I mentioned this in a post earlier this year. The credit is available for both 2009 & 2010 so you won't miss out completely if you wait until next year. But if you are already planning to make eligible improvements, then why not make them by the end of 2009 and get the credit sooner?