Tax Articles

Eight Year-End Moves That Can Cut Clients Tax Bills for 2009 and 2010

Not Too Late

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Many of your clients may live from one return to the next, at least as far as taxes are concerned. For eleven months out of the year, taxes are the last thing on their minds.

You can do your clients a big favor if you can help them from move beyond simple tax-return reporting to tax planning. Autumn is a good time to get this tax planning process started. You are not inundated with tax returns yet and there is still time for your clients to take action before the end of the tax year. You may want to invite selected clients in for a year-end planning conference.

2009-2010 Year-end Planning

Tried and True

Many of the year-end planning techniques that have worked in the past may still be appropriate for the 2009-2010 tax years. For example, accelerating a state estimated tax payment from January 2010 to December 2009 will increase a clients 2009 deduction for income taxes if he or she itemizes.

New Twists

On the other hand, there are a few new twists that you should keep in mind when you and your clients discuss year-end plans.

• The approach to annual inflation adjustments in the tax figures will be different in 2010—in that there wont be any adjustments. Because of the low rate of inflation, many of the figures (e.g., personal exemptions) will not change in 2010, and others will change so slightly that the difference will be negligible. This means that for the first time in years, if clients have the same income in 2010 as in 2009, their tax will be basically the same.
• Many year-end tax techniques involve postponing income and accelerating deductible expenses to reduce taxes for the current year. But, because of the economic downturn, some clients may have significantly less income in 2009 than they expect to have in 2010. Doing things in reverse -- deferring expenses and accelerating income -- may save the clients more in taxes if they will be in a higher tax bracket in 2010 than in 2009. But, of course, you will have to factor in the time value of money to see if this reverse strategy is worthwhile.
• A number of tax provisions are scheduled to expire at the end of 2009, so, where possible, it may be time to "make hay while the sun shines." On the other hand, some of these provisions may (and likely will) be extended by Congress. You will want to keep a close eye on developments in Washington and keep your clients posted.
• There are several new changes that take effect in 2010. For example, the income restriction is removed for clients who want to roll funds in a traditional IRA over into a Roth IRA. (See our article, Is 2010 the "Year of the Roth?"). And the phase-out of personal exemptions and the phase-down of itemized deductions for high-income clients are eliminated in 2010. You will also want to review these changes with clients.

With these points in mind, lets take a look at some of the year-end techniques you may want to discuss with your clients.

Eight Year-End Moves

1. Home Buying. November 30, 2009 is the last day that clients will be able to take advantage of the new up-to-$8,000 first-time homebuyers tax credit. Clients who have found a home should do whatever is necessary to make sure the closing takes place no later than November 30.

The credit cannot be claimed if the client owned another principal residence (or main home) at any time during the three years prior to the date of purchase. (For a married couple filing a joint return, this requirement applies to both spouses.) For example, if a client closes on November 1, the credit is not available if he or she owned, or had an ownership interest in, another principal residence at any time from November 2, 2006, through November 1, 2009.

2. Charitable Giving. Even in rough economic times, many clients may still want to support their favorite charities. And making a donation before year end will reduce the tax bill of itemizers.

If a client is considering donating property to a charity, it may be more beneficial from a tax standpoint to sell the property and donate the proceeds.

For example, suppose a client has an old car with a "Bluebook" value of $5,000. If the car is donated to a charity and the charity turns around and resells it for $3,000, the clients deduction is limited to $3,000. But if the client sells the car for $5,000, he or she can claim a $5,000 deduction if the proceeds are donated to the charity.

Take another example involving shares of stock that have slumped in price. If a client donates the shares, the charitable deduction is the current depressed value. But if the shares are sold and the proceeds are donated, the client gets (a) a capital loss deduction for the difference between the shares basis and the selling price and (b) a charitable deduction for the donated proceeds.

3. Stock Investments. While the stock market has not been doing too badly this year, it still has a long way to go to recover from the beating it took in 2008. Assuming it makes investment sense, clients may want to use their paper losses to their tax advantage.

For example, suppose a client has held XYZ stock for years and has a substantial paper profit despite the current market conditions. The client also has a lot of realized short-term losses. This may be the time to sell XYZ stock (again, assuming it makes investment sense). The losses will eliminate the potential capital gains tax on the XYZ stock.

On the other hand, if the client also has some short-term gains, its better to offset the short-term losses against the short-term gains. Since short-term gains are taxed at the same rate as ordinary income, that would eliminate an even larger potential tax. If the client still wants to sell the XYZ stock, a sale early in 2010 would make more sense than one before year-end.

4. Business Equipment and Machinery Purchases. New business equipment and machinery must be placed in service by December 31, 2009 to qualify for the special 50% bonus depreciation allowance. And the maximum Section 179 expensing deduction decreases from $250,000 to $125,000 for equipment and machinery placed in service after December 31. So, where practical, business clients may want to accelerate planned 2010 purchases into 2009, especially for items with a long cost recovery period.

Note that the full 50% bonus depreciation allowance is available even if the property is not placed in service until December. The so-called "mid-quarter convention" rule that can limit depreciation deductions on year-end purchases does not apply to the 50% allowance.

5. Automobile Purchases. Even though the "cash-for-clunkers" program has expired, there is still an incentive to buy a new car sooner rather than later. Both itemizing and non-itemizing clients can deduct the state or local sales and excise taxes on the purchase of a "qualified motor vehicle" after February 16, 2009, and before January 1, 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less. 

There is no restriction on the vehicles fuel efficiency but the amount of the deduction is limited to the tax on the first $49,500 of the purchase price of the vehicle.  The deduction is phased out over a $10,000 range that begins when modified adjusted gross income is more than $125,000 ($250,000 if married filing a joint return).

Business autos. The expiration of the 50% depreciation allowance also means that another tax break is expiring: The increased dollar caps on auto depreciation deductions under Section 280F of the tax code. The dollar cap for 2009 on first-year depreciation was originally set at $2,960. But when Congress extended the 50% allowance through 2009, the dollar cap was raised to $10,960. For purchases after December 31, 2009, the dollar cap will revert back to the old limit (as adjusted for inflation).

6. Miscellaneous expenses. As you know, miscellaneous expenses, such as unreimbursed employee business expenses, investment expenses, and tax preparation fees, are deductible only to the extent that they exceed 2% of adjusted gross income. So clients may ride along year after year with no deduction even though they incur relatively significant expenses. This may make it advantageous to bunch these expenses -- accelerating and deferring the expenses so that one years expenses result in a deduction. For example, if an employee buys a new business car (see above) or a new business computer in 2009 or accelerates business trips from 2010 to 2009, he or she may have enough expenses to get over the 2% mark. Reducing adjusted gross income can also, of course, increase the miscellaneous expense deduction (see next item).

7. Reducing adjusted gross income. At one time, year-end techniques to defer income and accelerate expenses were keyed into reducing taxes by reducing taxable income. But in recent years, many tax breaks have been enacted in which eligibility is determined by adjusted gross income. The breaks are phased out when adjusted gross income exceeds certain thresholds. Accelerating itemized deductions wont help here, but reducing adjusted gross income will help. For example, if a client can postpone payment of a year-end bonus until early 2010 or accelerate education expenses to maximize the 2009 "above-the-line" education deduction, he or she may qualify for a tax break not otherwise available.

Here are some of the most important tax breaks subject to phaseouts along with the 2009 threshold for each phaseout.

• Adoption credit ($182,180).
• Educational exclusion for U.S. savings bonds ($104,900 for joint returns and $69,950 for others).
• Interest deduction on education loans ($120,000 for joint returns and $60,000 for others).
• First-time homebuyers credit ($150,000 for joint filers and $75,000 for others).
• American Opportunity (Hope) credit ($160,000 for joint filers and $80,000 for others).
• IRA deductions for "active participants" ($89,000 for joint filers and $55,000 for others).
• Contributions to Coverdell education savings accounts ($190,000 for joint filers and $95,000 for others).

(Note: See also Last-Chance Opportunity: 22 Tax Breaks That Expire in 2009.)

8. IRA Distributions. IRA owners are generally required to begin receiving annual "required minimum distributions" (RMDs) once they reach age 70½ . The Worker, Retiree, and Employer Recovery Act (P.L. 110-458) suspended the RMD requirement for 2009. But some clients may have received 2009 RMDs anyway. At the time they may have thought they needed the cash and requested it. Or they may have received RMDs due to the payor's error. In any case, the IRS recently announced that IRA owners who received RMDs for 2009 can avoid tax on them by rolling them into another IRA (or back into the original IRA). The rollover must be completed by the later of (1) 60 days from the distribution or (2) November 30, 2009 [Notice 2009-82, 2009-41 IRB].

Terence M. Myers, J.D. and Dorinda D. DeScherer, J.D. are nationally renowned writers on tax topics for such publications as Accountants Tax Weekly, Tax Return Preparers Letter, Nonprofit Tax and Financial Strategies, and Executives Tax and Management Report. For many years Myers was Managing Editor and DeScherer Assistant Managing Editor for many Prentice Hall tax newsletters. Myers and DeScherer have published books and other publications with Harcourt Professional Publishing, Aspen Publishers, Prentice Hall, and the AICPA.

Last Updated: 10/07/2009