Introduction
Certain tax deductions are set to expire at year’s end. Among them are the enhanced Section 179 deduction and bonus depreciation. The decisions you make in these final months of 2009 can have a major impact on your taxes next April. This article will identify some key strategies that should be implemented prior to the end of the year.
Deferring Income
The more taxable income you make in 2009, the more taxes you will pay. Therefore, it is logical to defer any income you can until next year. This is especially true if you or your business will be in a higher tax bracket this year as a result of your tax planning.
For business tax planning, you may want to send out your monthly billing later in the month of December so that any payments are credited and recognized as income in 2010, if you are on the cash method of reporting.
For individuals, if you are to receive a bonus, defer it until next year. (BE CAREFUL – if you have a retirement plan that is based on a percentage of your gross pay for the year, you don’t want to reduce your retirement contribution because of your deferred bonus) Finally, you may decide to defer income the more traditional way, by participating in a deferred compensation plan, buying tax deferred treasury securities, or some specific certificates of deposit that allow for deferral of interest income.
Accelerating Deductions
We all hate paying bills, but now is the best time to pay them. Even if you wait to pay them until December 31, you can still deduct them. For business tax planning, buy supplies in December, and stock up for the next few months. In addition, the IRS will allow you to deduct the expense if you have charged the item to a credit card and not paid for it this year as long as you are on the accrual method of reporting. For example, use your company credit card to purchase supplies for January, deduct the expense now, and pay the bill in January.
Individuals, remember to recognize any capital losses that you may have before year end.
You are allowed to offset capital gains each year with any losses you incurred, and if the loss isn’t fully utilized this year, it can be carried forward to offset future gains to the extent of $3,000 per year. Pay your investment expenses early, including any mortgage interest, real estate taxes, and any state and local taxes.
Beefing up Section 179 Deductions
As part of the American Recovery and Reinvestment Act, businesses can still expense up to $250,000 of equipment purchases under section 179 of the Internal Revenue Code. The 2009 Act also continues the threshold phase-out amount to $800,000. This enhanced amount applies to property purchased and placed into service during 2009. The payment of such purchases can be deferred until 2010.
Bonus Depreciation
Bonus depreciation is still in effect this year!!! The bonus amount of the depreciation is now 50% for qualifying property. The provisions of the new law are very similar to the version passed by Congress in 2003 and 2004. Under the new law, equipment must be of original use beginning after December 31, 2007 and before January 1, 2010. Remember, buy new equipment this year and pay for it next year.
Charitable Contributions
Businesses and Individuals can make and deduct charitable contributions. Individuals have large deductible limits, generally around 50% of adjusted gross income. C Corporations are generally limited to 10% of profits. Make an early contribution to your favorite charity. This contribution can include personal property such as clothes and furniture, but remember to keep receipts for future proof of your generosity. Additionally, if the charitable deduction (of noncash items) for the year totals $5,000 or more (including C Corporations) a qualified appraisal must be made and attached to the tax return. Utilizing your credit card can be advantageous here as well, as more charities are accepting credit card donations.
Look for Tax Credits
Tax credits are one of the most beneficial tax planning tools available to many individuals today. They are a dollar for dollar credit applied to your taxes due. Some examples for individuals include the Child Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit. Also, remember to use up any money set aside in a flexible spending account health plan (otherwise known as a “Cafeteria Plan”). The money left in these funds does not typically carry over to the following year.
Conclusion
Lowering taxable income by deferring income, accelerating deductions, giving to charity, and utilizing tax credits, results in lower tax liability. These methods work not only this year, but also year to year.
The Center routinely examines tax situations and engages in tax planning, business succession, and estate planning. If you are considering beginning estate planning, keep in mind that you have until December 31 to take advantage of 2009’s gift exemption of $13,000. If you need assistance, contact the professionals at The Center.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors