As we approach the end of 2009, spending some time on year end planning could save money on your 2009 income taxes. The key is to strategize effectively to maximize deductions and credits. Consider the following suggestions with your tax accountant:
Standard Deduction: If you use the standard deduction of $11,400 for married or $5,700 for single, there are additional deductions available in 2009. First, homeowners using the standard deduction can deduct real property taxes paid in 2009 up to $1,000 for married or $500 for singles. Second, if you purchased a new vehicle between Feb. 18 and Dec. 31, 2009, weighing 8,500 pounds or less, or if you purchased a motor home of any weight, you can deduct the sales tax attributed to the first $49,500. These additional deductions are reduced in phases once your Adjusted Gross Income (AGI) reaches $250,000 for married couples and $125,000 for singles.
Itemized Deductions: Losing out on deductions due to AGI limitations can be minimized by “bunching” expenses into one year or another. If your medical expenses are approaching or exceed 7.5% of your AGI, consider accelerating procedures planned in early 2010 to 2009. Conversely, if you are far short of the limitation in 2009, but anticipate significant costs in 2010, consider delaying non-urgent procedures to next year. Tally up all of your out-of-pocket costs including co-pays on prescriptions, doctor and dentist visits, hospitalization, long term care, eyeglasses, and after-tax insurance premiums, including Medicare insurance withheld from Social Security. Then compare your expenses to your limitation amount. Payment by credit card is treated as a current cash payment, even if you pay the credit card company next year.
Continuing with the bunching concept, the vast category of miscellaneous itemized deductions that must exceed 2% of your AGI should also be considered so that you don’t lose a deduction due to lack of planning. Look for un-reimbursed employee business expenses, union dues, accountants and attorneys fees related to tax and estate issues, investment fees, continuing education, and professional licenses and fees. See if you can accelerate or delay payments to maximize your overall deduction in either 2009 or 2010.
Prepaying property taxes on your home, investment property and vehicles is a common strategy to accelerate deductions. State estimated income tax payments, if paid by Dec. 31, can be deducted in 2009. You have a choice between deducting the greater of state income taxes or sales and use taxes. For the latter, you can use a standard IRS table and add sales taxes paid on vehicles, boats, aircraft, a home and home building materials.
Taxpayers should be aware that the alternative minimum tax may negate some or all of the savings from the above strategies, so before you make any decisions, find out if you are affected.
Go Green! Energy Tax Credits: For 2009 through 2016, expenditures for solar energy equipment and installation on a personal residence qualify for a 30% Federal tax credit. The credit is allowed against both regular and alternative minimum tax. Any unused credit can be carried forward. Other types of energy efficiency costs also qualify for a 30% credit, on items such as insulation, windows, doors, roofs, heating and air conditioning, and non-solar water heaters. The credit for these items is limited to a maximum $1,500 combined for 2009 and 2010.
Timothy D. Evans, CPA, MS in Taxation, is a Senior Manager with Vicenti, Lloyd & Stutzman LLP.