Say the word “taxes” and most people groan. There are good reasons for this response: Many taxpayers view the cost of paying taxes as a financial burden, and feel frustrated every time they review their paychecks after federal income taxes, state income taxes, social security and Medicare taxes are withheld!

Current tax laws are very complicated and change constantly. The federal tax rules were less than 400 pages in 1913 and increased to 67,204 pages by the year 2007!

Unfortunately, for many taxpayers, your tax bill just went way up. When the clock hit midnight on January 1st, 2010, some 70 new taxes on the middle class and small businesses went into effect, thanks to Congress’ failure to prevent the expiration of many popular and economically vital tax breaks. For example, the Senate Finance Committee estimates that about 25 million middle class Americans are now expected to get hit with the Alternative Minimum Tax (AMT) in 2010.

Here is a list of some of the many tax reduction strategies that expire in 2010:

• The homebuyer’s tax credit
• Tax deduction for state and local taxes
• Tax deduction for college tuition and fees
• Research tax credit for businesses
• Tax-free IRA payouts to charities

Congress has promised to visit reinstating many of the tax breaks that have expired. It is highly doubtful that in an election year that Congress will allow 25 million Americans to experience a surprise AMT bill.

How can you combat the feeling of dread when it comes to taxes? It helps to know that the tax laws are peppered with many, many tax breaks to which you may be entitled.

Here is a report that can help you identify some tax areas for you to investigate. Of course, just like with any other tax report, you should always consult your tax professional before making any changes or final decisions.

We hope you find this information helpful.

Yours truly,
Jerry Lynch
CFPâ„¢ CLU ChFC

Table of Contents

Introduction 3
Tax Law Changes Effective 2011 3
Tax Laws Effective 2009 4
- Filing Options 4
- Capital Gains and Losses 4
- Tax Strategies for IRAs and Other Retirement Accounts 7
- Eight Tax-Savvy Tips for Small Business Filers 10
- Refunds, Interest, Refinancing and Moving Costs 11
- Education-Related Savings 12
- Tax Breaks for Charitable Contributions 13
- Medical Deductions 14
- Miscellaneous Important Areas to Review 15
- Take Advantage of Tax Credits 18
- Alternative Minimum Tax 20
- Summary 20

Introduction

Many new tax laws have been passed over the last decade, a number of which were geared primarily towards stimulating the U.S. economy. Quite a few of these laws came into effect in the last couple of years and some of them will not officially start until 2011! Several rules are only good for one year—unless, of course, they get extended again!

This special report reviews some of the major tax law changes that have taken place and covers a wide range of tax reduction strategies for all types of taxpayers: individuals, trusts, business owners, inheritors, retirees and those nearing retirement. In fact, it’s still not too late to reduce your 2009 income taxes. As you read this report, please note each specific tax strategy you think you could possibly incorporate in your particular scenario. Remember that every situation is different and the strategies discussed may not be appropriate for all taxpayers. Tax laws, as you know, are very complex and often one strategy might offset another strategy. What worked in the past might not be appropriate today. In addition to this, your state income tax laws could be different from the federal income tax laws. Be sure to reconfirm what the income tax liability would be before any action is taken. It is prudent to discuss any ideas with your tax preparer prior to making any final decisions.

Although the majority of this report is geared towards reducing 2009 income taxes, we felt it was also important to inform you about any major tax law changes, even if they don’t become effective until 2010. I hope you will find this information helpful.

Tax Law Changes Effective 2011
Source: TIAA CREF, 2007

Unfortunately, there will most likely be a significant income tax increase starting in 2011 even if no new tax laws are passed! How can this happen?

There were many tax laws passed by Congress in 2001 that significantly reduced the income taxes rates. Unfortunately, many of these tax changes were temporary and scheduled to expire, or “sunset”, 10 years later. Unless Congress passes new legislation, the lower income tax rates that took effect in 2001 will expire in 2011 and the higher tax rates that existed pre-2001 will be reinstated.

For example, the current 15% top tax rate on qualified dividends will become taxable as ordinary income at rates up to 39.6%! The top 15% tax rate today on long-term capital gains will increase to 20%.

The current administration proposes a number of changes in the current tax laws. President Obama’s proposals include reinstating many of the expiring tax laws mentioned above. In addition, many of Obama’s proposals would make some of these temporary tax breaks permanent.

President Obama wants to revise the higher top-tax rates (36% and 39.6%) which were in effect before the Bush tax cuts were passed in 2001. The proposed plan in fiscal 2011 would start the 36% tax bracket at about $231,000 of taxable income for married couples and about $196,000 for single filers. Obama’s plans also include cutbacks in itemized deductions and personal exemptions for higher wage earners.

Tax Law Changes Effective 2009

Filing Options

1. Married Filing Jointly or Married Filing Separately? In some situations, it may be more beneficial for a married couple to file separately. In others, it might be best to consider filing a joint tax return. However, once you file jointly, your tax return cannot be amended to file separately, so calculate your tax both ways before filing. It often makes a big difference in your income taxes, especially if there is a significant medical deduction for one of the parties and you can show that there was also very little income for that individual.
2. Are you considered divorced for tax purposes? In certain circumstances, you can actually file as single or head of household even if the divorce is not finalized. Make sure you see your tax preparer for these details.
3. Are you taking all available dependent exemptions? If you are taking care of a dependent relative who earns little and you furnish more than 50% of that person’s financial support, make sure that you take the dependency exemption for that person. If you also pay for the dependent’s medical expenses, you can deduct those as well. There is now a new uniform definition of a child that applies to exemptions, a child tax credit, an Earned Income Credit, and a dependent care and Head of Household filing status.
The value of each personal and dependency exemption is $3,650 in 2009, up $150 from 2008. Unfortunately, it eventually begins to partially phase-out at $166,800 of AGI for single filers and $250,200 for joint filers.
4. Need more time to file your 2009 personal tax return? If so, apply for an automatic filing extension, form 4868, by April 15th, 2010 and the IRS will grant you an extra 6 months, no questions asked! However, an extension to file is not an extension to pay the tax. You still must estimate your income tax liability based on the information you have when you file for the extension. You must pay at least 90% of your 2009 estimated tax liability or 100% of 2008’s tax liability by the April 15th due date. Otherwise, the IRS may assess tax penalties.

Capital Gains and Losses

1. Don’t miss the 0% tax rate on long-term capital gains and qualified dividends. If you are in the 10% or 15% tax brackets for 2008, 2009, or 2010, the profit from the sale of assets owned for over a year and dividends that are generated by stocks is income tax-free until it pushes you into the 25% tax bracket. In 2009, the 25% bracket begins at $67,900 of taxable income for joint returns and $33,950 for single filers. Once your taxable income exceeds these thresholds, the remainder of your qualified dividends and long-term capital gains is taxed at 15%.
2. Double-check any capital gains. In the event that you sold an asset during 2009, you most likely incurred a capital gain or loss. You will need to know the tax basis for this investment, which is usually what you paid for it, but this is not always the case.
There are various methods to calculate your basis and capital gains (or losses). Unless you tell your broker otherwise, the IRS and the financial institution assumes you are calculating the average cost basis— add up the cost of all of your shares and divide by the number of shares you own. (Note: Once you sell shares using this averaging method, you are stuck with using this calculation for that investment, even if you own the investment in different accounts.)
For some investments, such as stocks, however, you are often likely to do better tax-wise with the specified shares method, which is when you identify the specific shares you would like to sell. These are usually the shares with the highest basis and therefore the sale will generate the least amount of capital gain (or generate a capital loss). Calculating the basis of individual stocks or other investments (and deciding which shares to sell) can be difficult, especially if you have held the security for years and have been reinvesting dividends.
For example, let’s assume you purchased XYZ stock 10 years ago for $60,000 and you sold it in 2009 for $80,000. The tax preparer will often assume that there is a $20,000 long-term capital gain. However, many investors reinvest their capital gains and dividends back into their investments and pay income taxes on these reinvested dividends and capital gains each year, which increases your cost basis and should be added to the original $60,000. Adjusting your cost basis in this way will reduce your capital gain and often creates a capital loss.
Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, the 1099 does not usually show the cost basis or realized gain or loss for each sale. If you don’t know the cost basis, call your broker and discuss with him/her which method you want to use to calculate the cost basis to make sure it is calculated accurately and results with the least amount of tax.
Mistakes in calculating the cost basis can occur frequently with inherited property. For example, let’s assume that “Harry” and “Martha” purchased a piece of raw land twenty years ago for $200,000, made no improvements to the land, and sold it for $1,800,000. However, let’s also assume that Harry passed away on November 20th, 2009 and Martha sold the property right after he passed away on November 25th, 2009. If Harry and Martha held this property as joint tenants, she would be entitled to a special tax break called a “step-up in basis”, which means that Harry’s basis in this property gets stepped-up to the fair market value as of the date of Harry’s death.
Let’s now calculate Martha’s new adjusted basis of this property. Harry’s original basis was $100,000 (half of $200,000) and Martha’s basis is also $100,000. However, if the fair market value as of the date of Harry’s death was $1,800,000, that means that Harry’s basis gets stepped-up from $100,000 (his original half) to $900,000 (half of the current fair market value as of the date of his death). Martha inherited his half and therefore her new basis would be her original basis (for 50% ownership) of $100,000 plus Harry’s step-up in basis (for his 50% ownership) of $900,000, for a new basis (for 100% of this property) of $1,000,000. In this case, Martha’s capital gain is $800,000 ($1,800,000 minus $1,000,000) rather than the $1,600,000 capital gain if it had been sold prior to Harry’s death.
Please also note that if Harry and Martha lived in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) and if they held title as community property or had a Community Property Agreement, there would have been a double step-up in basis. Martha’s new basis would be 100% of the fair market value as of the date of Harry’s death. Harry’s half ownership would still have received the same step-up in basis, as mentioned above, but so would Martha’s half. By doing this, Martha’s new basis for the property would have been the full $1,800,000, and if she sold it for $1,800,000, she would not have any capital gains. And, of course, with no capital gains, there would be no income tax at all. Talk about tax savings!
*Very important.* If a married couple did not have a community property agreement at the date of one of the spouse’s deaths, the surviving spouse usually has another strategy. The surviving spouse usually can file a spousal property petition and go to court and show the judge that the money used to purchase this property was community property and that you were married at the time that you purchased the property. In most cases, the judge will rule that the property (and other assets as well) are deemed to be community property and therefore most of the assets in the estate will receive a double step up in basis, which reduces taxes significantly, as illustrated earlier! There is a limited amount of time that the surviving spouse has in order to file this special petition, which can vary state by state.
Please also note – if an investment was sold in a prior year and you discover that the basis was calculated incorrectly, you can usually go back as far as three years to amend your tax return and you may receive a tax refund.
In the event that someone is in extremely poor health, be aware of the tax consequences of any sales or gifting of assets. Remember – if the taxpayer sold an appreciated asset prior to passing, there will be capital gains. In the event that someone inherited this appreciated property after the client passed, there usually will be a step-up in basis and the asset can be sold with no capital gains at that point. Be careful – gifted assets do not receive a step-up in basis. In the event that an individual gave appreciated assets away on his death bed before he passed, the recipient would not receive a step-up in basis and would still have the same lower cost basis as the donor.
3. Maximum home-sale exclusion. The home-sales gain exclusion offers one of the biggest income tax breaks. You can have a gain of up to $500,000 for a joint couple ($250,000 for single filers) income tax-free on the sale of a house that you have used as your primary residence for at least 2 out of the 5 years before the sale.

In many circumstances you are also eligible for this exclusion even if you have not lived there in the last two years if the sale is due to change of employment, health, or other unforeseen circumstances.

This is not a one-time election. You can still take this exclusion even if you have used it in the past.

Unfortunately, in the past, the full $500,000 exclusion could be claimed only if a couple filed a joint tax return in the year they sold it. So, if the surviving spouse sold the home a year after the death of the spouse, the spouse was limited to the smaller $250,000 exclusion. This new tax law allows the surviving spouse to take the larger $500,000 exclusion for a sale occurring within 2 years of the deceased spouse’s death (assuming the individual meets other tax law requirements).
4. Recalculate depreciation on inherited rental or business property. As mentioned above, if you inherit any depreciable assets (such as rental property), there is usually a step-up in basis on part or all of the property and the property can then be depreciated all over again using the current fair market value as of the date of death!
5. Check last year’s income tax returns for any capital loss carry-over. In the event that you had over $3,000 of net capital losses in 2008, the difference can be carried forward to 2009. This is often overlooked and is extremely useful since capital losses from prior years can offset the current and future year’s capital gains without limitations.
6. Opt out of an installment sale. If you’ve sold a capital asset, such as real estate, in 2009, it might make sense to record the entire taxable gain all at once in 2009 even if you are taking payments on an installment basis. Remember that joint filers who have a taxable income of $67,900 or less have a long-term capital gains tax rate of 0% and therefore they should consider recognizing all the proceeds from the sale this year and possibly avoid capital gains tax all together.
Another reason to recognize 100% of the gain in 2009 is that you might have realized losses from your portfolio in 2009 that can be used to offset the extra capital gain on the installment sale.
7. Do you own any worthless securities? If you were unlucky enough to own shares of a company that went bankrupt in 2009, you might be able to claim a deduction for the worthless stock. Be careful not to forget about this, as worthless securities sometimes have a way of disappearing from brokerage statements.
Even if you did not sell the worthless stock during the last year, you can still claim it as a tax deduction if you can show that it is technically worth less than what it would cost to sell it or if it is no longer traded on any of the stock market exchanges. Be careful because if the company files for bankruptcy protection while it reorganizes, the company is usually deemed to still have a profit motive and their stock is not necessarily considered worthless. However, once the company essentially ceases all operations with no plans of resuming, you are usually able to deduct the cost basis in this stock or bond even without selling it. For added insurance for this tax deduction, get a letter from your brokerage company confirming it is a worthless security or sell it to someone for a small price, such as $1.
Please remember that if you own a worthless investment in a tax-deferred account, such as an IRA, the loss is not deductible.
8. Review losses on start-up corporations. In the event that you are one of the original owners of a closely held corporation, then hopefully your tax attorney established in your articles of incorporation that this was a Section 1244 company. If a Section 1244 company goes belly-up, then 100% of the loss up to $100,000 is immediately deductible in the year it becomes worthless. The amount over $100,000 is deductible as a capital loss.
9. Review any bad debts that became worthless during 2009. If you lent money to someone and you are unable to collect the amount that is owed, you can usually claim a deduction for this bad debt. However, this non-business bad debt is deductible in the year in which it actually becomes totally worthless.
It is best to document any correspondence and other type of communication that supports your claim that the bad debt (or other investments) became worthless during 2009 and not in some other year. Providing this documentation should assist you significantly in discussing this subject with the IRS should an audit arise. Correspondence created after an IRS audit is often not looked upon very favorably.

10. Don’t forget a tax break on bonds. If you buy bonds on the secondary market, chances are you will owe part of your first interest payment to the seller. However, when you receive the 1099 for the bond interest, it will usually state that all of the interest was paid to you. You can deduct from that number the amount you paid to the seller, and you will only pay tax on the difference. This is a much-overlooked tax break for bond investors!

Tax Strategies for IRAs and Other Retirement Accounts

1. The Worker, Retiree, and Employer Recovery Act of 2008 was signed into law by President Obama on December 21st, 2008, and suspended mandatory withdrawals (RMDs) from retirement accounts for 2009 only. This should reduce the income tax in 2009 for most retirees, but there is not a lot you can do in 2010 except cross your fingers. Cross your fingers? A tax bill was recently entered into Congress to extend this law through 2010. We will keep you updated because this could seriously change your tax planning for 2010. However, as of the date of this report, this suspension of RMDs is good for 2009 only.

2. Make your 2009 IRA contribution as late as April 15th, 2010. There is still time to trim your 2009 income taxes by contributing to a tax-deductible IRA. You can contribute up to $5,000 (or $6,000 if you are 50 or older) until the time you file your income tax return, but no later than April 15th, 2010.

If you participate in a retirement plan at work, the IRA deduction phases out if you are married and your joint AGI is $89,000 or more, or if you are single and your adjusted gross income is $55,000 or more.

3. Make a deductible contribution to a spousal IRA. If you do not participate in a workplace-based retirement plan but your spouse does, you can deduct some or all of your IRA contributions on your 2009 income tax return as long as your adjusted gross income does not exceed $176,000.

4. Make a contribution to a Roth IRA. Contributions to Roth IRAs are not tax deductible, but the earnings on them may be withdrawn totally income tax-free in the future as long as the distributions are qualified. A Roth IRA distribution is qualified if you have had the account for at least five years and the distribution is made after you’ve reached age 59½; because you have a permanent disability; in the event of your death; or for first-time homebuyer expenses. Contribution limits are the same as traditional IRAs, except the maximum contribution for both Roth and traditional IRAs is still limited to $5,000, or $6,000 for persons age 50 or older. Regardless of whether you’re covered by an employer plan, to qualify for a Roth, your AGI for 2009 cannot exceed $176,000 if you are married or $120,000 if you are single. You can also make a spousal Roth IRA contribution, subject to the same phase-outs, for a non-working spouse.

5. Consider “re-characterizing” your Roth IRA back to a traditional IRA if you converted from a traditional IRA to a Roth during 2009. (We’re talking about conversions here, not contributions.)

Please note: Prior to January 1st, 2010, you could only convert a traditional IRA to a Roth IRA if your AGI was $100,000 or less (before the conversion). However, this dollar cap is now removed starting January 1st, 2010 and there is no limit to your earnings in order to qualify for a Roth IRA conversion.

Please also note that a Roth IRA conversion does not have to be all or nothing. You can convert any dollar amount you decide is best for your situation. In addition, if you convert to a Roth IRA in 2010, the income can be reported 100% on your 2010 tax return, or you can report 50% of the Roth conversion on your 2011 tax return and 50% of the Roth conversion on your 2012 tax return. Unfortunately, this could backfire because tax rates will most likely increase starting in 2011. Why defer the income to future years if you will be in a higher tax rate?

You may have converted part or all of your traditional IRA to a Roth IRA during 2009. The taxable income for the conversion is based on the value of your account on the conversion date. Unfortunately, the value of your Roth IRA account may have dropped since then. A strategy to avoid paying higher taxes than necessary is to re-characterize (undo) your Roth IRA, switching it back to the traditional IRA so you will not be taxed on the higher value of the IRA at the time of the conversion. By returning the money to the traditional IRA, you eliminate the need to pay tax on the Roth IRA conversion. The deadline to re-characterize a 2009 Roth IRA conversion back to your traditional IRA is October 15, 2010, assuming that you file the maximum tax extensions. If you already filed your tax return for 2009, file form 1040X to get back the tax you paid on the conversion.

This strategy offers the potential for significant tax savings. For example, let us assume your traditional IRA was worth $300,000 when you converted it to a Roth IRA on January 10, 2009. Let us assume that all the funds consisted of deductible IRA contributions and tax-deferred earnings. If you are in the 35% income tax bracket, the conversion would cost you $105,000 in income taxes ($300,000 x 35%).

Let us now assume that the stock market dropped and the current value of your Roth IRA has declined to $200,000. It is difficult enough to swallow the fact that your IRA account has gone down in value, but it is even worse when you discover that you have to pay the tax on the full $300,000 conversion even though your Roth IRA account value is now only worth $200,000! Therefore, in most cases it would be best to re-characterize the Roth IRA back to a traditional IRA. Then, if you want to, you can reconvert the funds in the “new” IRA back into a “new” Roth IRA. There is a 31 day requirement before you can reconvert the funds back into the Roth (remember – this is optional), but the tax savings on this simple transaction are significant – $300,000 less $200,000 = $100,000 x 35% = $35,000 less taxes merely by filling out some additional paperwork!

6. Consider re-characterizing part of your Roth IRA conversion even if your Roth IRA account went up in value. This sounds a bit strange at first, but many taxpayers probably converted too much into their Roth IRA in 2009. In most cases, you should only convert the amount that would push you to the top of your current federal marginal income tax bracket. For example, if your taxable income is $50,000 and you are married filing a joint tax return, you will go from the 15% tax bracket to the 25% tax bracket once your taxable income reaches about $68,000. Therefore, the optimal amount for the conversion during 2009 would have been about $18,000. Calculate how much you should have converted and compare it to the actual amount that was converted. If the converted amount was significantly more than the optimal amount, you might want to re-characterize to reduce your taxes.

As you can see, the tax rules regarding Roth IRAs can be very complicated and confusing. We have a new booklet on this subject called “To Roth or Not to Roth?” which covers all these new rules in much greater detail. If you would like to receive a free copy of this booklet, please call our office at (973)439-1190. Roth IRA conversions and re-characterizations may not be appropriate for all investors. Please also call us if you have any questions or would like to review these details in person.

7. Do not overlook the Retirement Savers Tax Credit. The saver’s credit is designed to help low-and moderate-income workers save for retirement. Lower-income taxpayers, such as young workers and retirees who work part-time, can reduce their tax bill by claiming the Retirement Savers Tax Credit. This tax credit, which has been made permanent, is worth up to $1,000 if you contribute $2,000 to a traditional or Roth IRA, 401(k), or other retirement plan at work. In order to claim the credit, you must be at least 18 years old and not a student, and you cannot be claimed as a dependent by anyone else. For 2009, you are eligible if you are single with an AGI of $27,750 or less, or married filing jointly with an AGI of $55,500 or less. This credit is in addition to the tax deduction that would otherwise apply with respect to the contribution. 2009 contributions can be made until April 15th, 2010.

8. Make your business retirement plan contribution for 2009 as late as September 15th, 2010, for calendar-year corporations. The maximum retirement plan contribution will vary depending on the type of retirement plan you have established. Consult your retirement plan administrator to review your options.

9. Have your business establish and fund a Simplified Employee Pension (SEP) IRA. Your business can still establish one in 2010 for 2009 until the extended due date of its tax return, provided it has no other pension plan. The extended due date for 2009 calendar year corporations is September 15, 2010 and October 15, 2010 for partnerships and self-employed individuals.

For 2009, you can contribute up to the lesser of these 2 amounts:
• $49,000 – an increase of $3,000 from 2008 – or
• 25% of your salary compensation up to $245,000 for 2009 or 20% of your self-employment income if you have a business.
Please note that contributions are discretionary, which means you are not locked into a particular amount for any year. You can change contributions for any reason or you can make no contribution at all. However, you must contribute the same percentage for each participant.

10. Working taxpayers can put away more money for retirement in 2009. The 401(k) plan maximum contribution rose to $16,500 in 2009 (a $1000 increase). Employees who are over 50 can also contribute an additional $5,500, for a total of $22,000. These contribution limitations apply to 403(b) and 457 plans as well.

11. Recheck penalties on distributions from retirement accounts. Withdrawals from IRAs and qualified retirement plans are often subject to a 10% early distribution penalty unless you qualify under any of the fifteen different exceptions that are available, such as disability and military service. For a list of these specific exceptions, please see IRS publication 575, Pension and Annuity Income.

Eight Tax-Savvy Tips for Small Business Filers

With a little effort, you can maximize the tax benefits for your small business. Here are a few examples:
1. Recheck your depreciation calculation. It generally takes a long time – 39 years to be exact – to write off the cost of most building improvements. Recently, Congress authorized a faster 15-year write-off period for qualified restaurants and leasehold improvements, which applies to expenditures by lessors and lessees. In 2008, the bailout law extended this tax strategy through 2009.
You might also qualify for bonus depreciation, which enables a business to deduct 50% of the cost of qualifying assets placed in service in 2009. This bonus depreciation is in addition to the normal depreciation.
2. Speed up equipment write-offs. Under section 179 of the tax code, you can elect to “expense”, or currently deduct, up to $250,000 of equipment costs and other business assets placed in service for 2009. The section 179 deduction is very favorable because you can take an immediate deduction for equipment, instead of depreciating it over a period of years.
3. Increase your home office deductions. If you are self-employed and use part of your home exclusively as your principal place of business (or exclusively as a place to meet or deal with clients, customers or patients in the normal course of business) you are entitled to deduct home office expenses. For example, you can claim a depreciation allowance plus write-offs for a portion of your home utilities, insurance, etc. Attach form 8829, which is Expenses for Business Use of Your Home, to your return.
4. Don’t forget out-of-pocket business expenses. Review all of your records to maximize your deductions at tax time. If you paid any business expenses personally, have the company reimburse you for these expenses, which is tax deductible by the business entity and income tax-free to you!
It may be possible to deduct some of these expenses on schedule A as Miscellaneous Itemized deductions. However, these expenses are usually not 100% tax deductible due to the 2% limitation and these Miscellaneous Itemized Deductions are not deductible for the Alternative Minimum Tax calculation. Therefore, it is usually best to run them through the business instead. Here are just a few tax deductable business expenses many taxpayers overlook:
• Legal and accounting fees.
• Business telephone calls made away from your office.
• Business supplies.
• Business usage of personal computer expenses such as paper, online services, printer, etc.
• Interest on credit cards. When you use plastic to pay for business expenses, the interest and often the carrying charges are fully deductible.
• Home entertainment. If you invite a client to your home to have a business discussion, you can usually deduct 50% of your entertainment costs.
• Subscriptions to business publications.
• Business use of automobile. The standard mileage rate is 55 cents per mile for 2009.
• Dues for professional organizations.
• Various travel expenses, such as the cost of luggage used exclusively for business travel, the dry cleaning of business clothes, and tips paid to doormen, luggage handlers, taxi, etc.
• Repairs to business equipment.
• Cell phone costs relating to business.
5. Know whether or not a fringe benefit is taxable income. The IRS has a handy guide to fringe benefits, which is a 118-page training manual for agents that has been updated to reflect the Service’s current views. Go to www.irs.gov/publications/p15b/index.html to view the handbook.
6. Maximize your write-off for that company holiday party. If you own a business and hosted a holiday party for employees, you can deduct 100% of your cost instead of the 50% usually deducted for regular business entertainment. And you didn’t even have to talk about business! Just make sure all of your employees were invited. To get the full write-off, you cannot discriminate by limiting the party to executives.
7. Recheck medical insurance premiums if you are self-employed. Self-employed people frequently overlook this deduction, which includes premiums for dental, vision, and long-term care insurance (subject to limitations), as well as general health insurance.
If you are a sole proprietor, hire your spouse and offer family coverage for all employees. If your spouse is your only employee there is no extra out-of-pocket cost. The full cost of the medical plan is deducted on schedule C as a business expense. However, you must be careful and make sure that the employee-spouse is the primary insured on the policy and that premiums are paid from the business checking account. Otherwise, the premiums will not be deductable as a business expense.
8. Check to see if you can take a Net Operating Loss (NOL) carry-back. C corporations and owners of pass-through entities, such as partnerships and S corporations, may have NOLs. In most cases, losses are automatically carried back for two years and carried forward up to 20 years to offset income in those years. However, most businesses can now elect to carry back losses for up to 5 years.

Refunds, Interest, Refinancing and Moving Costs

1. Do not necessarily report a State income tax refund as taxable income. If you filed a standard deduction in 2008 on your Federal tax return, the state refund you may have received in 2009 is income tax-free.
2. Review interest paid on your home equity line of credit to determine the right tax form to take the deduction that gives you the most tax savings. You can deduct mortgage interest on up to $100,000 of home-equity borrowing, regardless of what the money was used for. Interest paid on mortgages of second homes is usually tax deductible too! Unfortunately, the interest on non-business and non-housing expenses is usually not deductible for computation of regular tax or the AMT (unless the loan was used to buy, build, or substantially improve your home and was secured by your home).

However, if you use a home-equity loan to pay business expenses, you can deduct the interest on it as business interest instead of mortgage interest on schedule A, provided you can trace the loan proceeds directly to a business use. Doing this can have several advantages over deducting it as a mortgage interest expense. Business interest is deductible on an unlimited amount of home-equity borrowing. Also, the business interest deduction is allowed under the Alternative Minimum Tax. Business interest expense also reduces income from a proprietorship, thus reducing self-employment taxes along with reducing your Adjusted Gross Income. Mortgage interest will not reduce either of these.

3. Review other interest expenses. If you borrowed on credit cards and utilized these loans for business purposes, then the interest is tax deductible. It is also possible that you borrowed money for investment purposes, which you can usually deduct up to the amount of your investment income. In many cases, however, it is best to get a home equity line of credit in order to pay off other non-business debt, which is not tax deductible.
4. Review your refinancing costs. If you paid points (loan fees) on a loan used to purchase a new residence, these are fully deductible in the year you purchased your house. Points associated with home improvement loans are usually fully deductible in the year that the points are paid.
Please note that if refinancing proceeds are used to improve a residence, the points are fully deductable when paid.
However, if you refinanced your house or purchased a rental property or second home, these points must be deducted over the lifetime of the loan. For example, let’s assume you had $6,000 of points you paid in 2002 for a rental property and it was for a 30-year loan. You took a deduction of $200 ($6,000/30) on each of your tax returns from 2002 to 2008, or a total of $1,400.
Any remaining points on mortgages repaid before the mortgage falls due are deductible in the year of the repayment. Let’s now assume that in 2009 you refinanced the property above for 30 years and paid new points of $3,000. You can then deduct the remaining $4,600 ($6,000 – $1,400) of the points on the old loan, plus $100 (one-thirtieth of the $3,000) on the new loan.
5. Remember deductions for mortgage insurance. If you bought your residence after 2006 and you made a down payment of less than 20%, you are probably paying for mortgage insurance. If your Adjusted Gross Income (AGI) is $100,000 or less, you can now deduct all of your private mortgage insurance, or mortgage insurance that you purchased through the Veteran’s Administration or Rural Housing Administration. (The IRS added a separate line to the form 1098 from your lender that shows how much mortgage insurance you paid in 2009.) Unfortunately, this deduction phases out completely once your AGI exceeds $110,000. This tax law is now extended through 2010.

Also, a new IRS ruling (IRS notice 2008-15) allows you to allocate premiums for qualified mortgage insurance through 2010 over an 84-month time period instead of the mortgage term, which will generally provide a much bigger deduction.

6. Did you move during the year? In the event you moved from one state to another, the old state usually cannot tax any income that you earned after the move. However, this can get tricky, depending on the specific date when you left that state. Be sure to recheck these numbers in order to avoid paying unnecessary state income taxes. If you worked in multiple states, determine if you paid the correct tax for that applicable state. There is often a credit available in your resident state for taxes paid to other states.
If you relocated for a new job that is at least 50 miles further from your old house than your old job was, you can claim moving expenses even if you don’t itemize other deductions. You can deduct 24 cents per mile for moving expenses incurred for travel in 2009.

Education-Related Savings

Congress has created a number of tax breaks over the last few years to help pay for education – including adult education. Each benefit has its own rules including differing income limits for those eligible to use them. In addition, using one may preclude you from using another. Examine all of the available options and select the best one for your particular situation. For help, consult your tax advisor or read IRS publication 970, Tax Benefits For Education.

1. Reduce your college tuition costs. The American Opportunity Tax Credit and the Lifetime Learning Credit are direct credits against taxes for education costs.
College expenses for yourself, your spouse, or your child are eligible. The Lifetime Learning Credit is now as much as $2,000 for 2009 and will essentially refund 20% of the first $10,000 you spend for higher education costs. The income phase-outs are $50,000 to $60,000 for individuals and $100,000 to $120,000 for couples.
2. American Opportunity Tax Credit. This temporarily replaced the Hope Credit for 2009 and 2010. The credit is 100% of the first $2,000, plus 25% of the next $2,000, spent each year on tuition, fees and course materials to a maximum credit of $2,500. It applies to all 4 years of college. Amounts paid in 2009 for the spring of 2010 are eligible for a 2009 credit. The credit phases out for single taxpayers with MAGI between $80,000 and $90,000 and for married couples with MAGI between $160,000 and $180,000.

3. Do not overlook the tuition deduction. This deduction was passed only a couple of years ago and is often overlooked by taxpayers and tax preparers. Unfortunately, this valuable tax perk is scheduled to disappear after 2009. Under this tax break, eligible taxpayers are able to deduct qualified higher education expenses of up to $2,000, or $4,000 paid on behalf of themselves, their spouses, or their dependents. The write-off is taken as an adjustment to income, which means taxpayers can claim it even if they do not itemize deductions; however, the top Adjusted Gross Income to qualify is $160,000 for married couples or $80,000 for single filers.
4. You may be able to deduct student-loan interest. If you are single and your AGI is $75,000 or less, or married with an AGI of $150,000 or less, you are eligible to deduct up to $2,500 in student loan interest for yourself, your spouse or your dependent. You can take the deduction regardless of whether you itemize.

5. Teachers should review un-reimbursed expenses for teaching supplies. The maximum amount is $250 and it is an above-the-line deduction, which reduces your adjusted gross income. You do not have to itemize for this deduction. If you have more than $250 in qualifying expenses, you might be able to deduct them as miscellaneous itemized deductions if you itemize.

Tax Breaks for Charitable Contributions

If you donate or volunteer, review these tax deductions:
1. Recheck your cash charitable contributions. There are new rules regarding charitable contributions made with cash. Taxpayers need to have a bank record or written communication from the recipient showing the name of the organization and the date and amount of the contribution in order to deduct cash contributions to a charity.

A credit card statement or print-out of an online contribution should be enough to pass these requirements. You must obtain “contemporaneous written acknowledgement” from the charity if the contribution is $250 or more but less than $500.
In the event you gave stocks or other assets in-kind to a non-profit organization during 2009, and you did not contribute 100% of that holding, be sure to identify the proper shares that were donated in order to take advantage of the tax laws.

For example, if you purchased 100 shares of ABC stock 20 years ago for a cost basis of $1,000 and they are now worth $5,000, and you purchased another lot of 100 shares of ABC stock 2 years ago for $8,000 and they are worth $5,000, make sure that you instruct your stock broker that the shares you want to gift to the non-profit organization would be the appreciated 100 shares and not the 100 shares that went down in value! If you also want to give the shares that have dropped in value, be sure to sell these shares first, take the capital loss on your personal tax return, and then contribute the proceeds. Please recheck the details to confirm that everything has been documented and calculated properly.

The IRS has certain rules that limit the charitable contributions a taxpayer can deduct on their tax returns. It is possible that a taxpayer might not be able to deduct 100% of their charitable contributions and can only take a deduction on their current income tax return using the following limitations:

• Cash charitable contributions in full up to 50% of the donor’s adjusted gross income.
• Property charitable contributions in full up to 30% of the donor’s adjusted gross income.
• Charitable contributions of appreciated capital gains assets in full up to 20% of the donor’s adjusted gross income.
• Any unused charitable contributions can be carried forward to future years.

2. Review your gifts to Goodwill and the Salvation Army. These organizations will often give you a receipt that is not entirely filled out. It is best to do a guesstimate to determine the approximate value of these non-cash charitable contributions. No deduction is allowed for a charitable contribution of clothing or household items unless they are in good used condition or better.

In the event that these gifts are worth more than $500 for the year, you must fill out form 8283. This is an easy form to complete and you should not lose an allowable deduction just because you don’t want to complete this form. However, if the total contribution is $500 or less, you do not need to fill out this form, but make sure you still get a receipt. If you donate a car or other expensive non-cash charitable contribution, there are rules for how much you may deduct. If you want more detailed information regarding these charitable contributions, please reference IRS publication 526, Charitable Contributions.

In addition to cash and property donations, you can deduct mileage, parking fees, postage and long-distance phone calls made while performing charitable work.

3. Remember charitable contributions made directly from your IRA to charity. Individuals who were at least age 70½ in 2009 could have given as much as $100,000 to charity straight from their IRA without having to pay tax on the distribution. These withdrawals, known as Qualified Charitable Distributions (QCDs), also count toward the taxpayer’s Required Minimum Distribution, yet they are not included in income. However, remember that no deduction is allowed for the charitable donation because there was never any tax paid on the distribution.
Although you cannot claim the contribution as a charitable deduction, there are still many benefits by doing so. For example, your lower AGI may reduce the taxes you pay on your social security benefits. It also might be easier for you to qualify for other tax breaks, such as deducting medical expenses that exceed 7.5% of your AGI. In addition, if you are subject to the Alternative Minimum Tax, a lower income may mean less of the AMT exemption is lost due to the phase-out of the exemption. This law expired on December 31st, 2009.

Medical Deductions

Recheck medical expenses. You can deduct medical expenses in the event that they exceed 7.5% of your adjusted gross income (AGI). Most taxpayers do not qualify for this deduction because their actual medical expenses usually do not meet this threshold. If your medical expenses appear to have reached this threshold, then recheck your tax records and determine if anything has been overlooked. Please note that the threshold is 10% of your AGI when computing your Alternative Minimum Tax.

• The limit on deductible pay-ins to Health Savings Accounts (HSAs) goes up in 2009. An HSA is another way to get a tax break for putting away money for health-care costs. HSAs allow you to pay for health care expenses with pre-tax dollars. You can also roll over unused contributions from year to year. So if you stay relatively healthy, it is possible to build up a nice nest egg for your retirement health costs.

You can contribute up to $3,000 to the plan for 2009 for single coverage ($5,950 for family coverage). Contribution levels rise gradually each year and if you are 55 or over, you can actually make an additional contribution of $1,000 in 2009.

• Review frequently overlooked medical expenses. Many tax deductible medical expenses are often overlooked, such as the following:
o The deduction limits for long-term care insurance premiums for 2009 have been increased from 2008 (the amount allowed for tax deduction varies depending on your age). Taxpayers who are age 71 or older can claim as much as $3,980 per person. Filers age 61 to 70 can deduct $3,180. Those who are age 51 to 60 can deduct up to $1,190. Individuals age 41-50 can take $600. And people age 40 and younger – $300. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $280 per day, whichever is greater.

o Nursing home costs
o Medicare insurance premiums
o The standard mileage rate for medical expenses is 24 cents per mile
o Prescribed weight-loss programs
o Stop-smoking classes
o Prescriptions, especially the donut hole on Medicare prescriptions
o Acupuncture
o Chiropractic care
o Therapy
o Braces or other dental work
o Eye glasses
o It may also be possible to deduct medical expenses paid for your parent or child
o Miscellaneous improvements to your house, such as adding a wheelchair ramp (or possibly even a hot tub, if the doctor prescribed this for various back problems). When in doubt, make sure you have a doctor’s prescription!

If you incur a cost that appears non-medical but that is really medically related, get a statement from your doctor confirming that the cost has a medical purpose and keep it on file in case of an audit. You can also check IRS Publication 502, Medical and Dental Expenses, to see if any special rules apply to the item. If no restrictions apply, deduct it!

• Check to see if you can deduct medical expenses you paid for relatives. Just because you aren’t eligible to claim a dependency exemption for a parent or other relative doesn’t mean you must lose out on deducting medical expenses you paid for them. For example, let us assume that Bill pays more than half of his father’s expenses. However, his father’s income in this example is greater than $3,650, which is the limit in 2009, and therefore Bill is unable to claim him as a dependent for this year. In this case, Bill can still include payments for medical expenses that he paid on his father’s behalf among his own medical expenses.

Miscellaneous Important Areas to Review

1. Write down all receipts you think are even possibly tax-deductible. Many taxpayers assume that various expenses are not deductible and do not even mention them to their tax preparer. Don’t assume anything—give your tax preparer the chance to tell you whether something is or is not deductible.

2. See if you can deduct even more losses from your rental real estate. You can usually deduct up to $25,000 of losses from rental real estate when you actively participate in its management. However, this deduction is phased out once your AGI rises from $100,000 to $150,000.

Please note that this rule does not apply if you are a professional real estate individual. In a new ruling during 2009, real estate agents can now claim a special tax break on their rental losses. Their rental real estate losses are exempt from the passive loss rules if they work more than half of their time and are materially involved in real estate at least 750 hours per year. This is the identical rule that applies to landlords, developers, and brokers.

3. State and local property taxes are still deductible for non-itemizers. Don’t forget to include the extra deduction for real estate taxes, which is still available for 2009. A non-itemizer can deduct state and local property taxes in addition to claiming the standard deduction. The deduction is limited to the lesser of the property taxes actually paid or $1,000 for joint filers ($500 for single filers).

4. New car purchases – sales taxes. Taxpayers who bought a new car before January 1st, 2010 may deduct sales and excise taxes on as much as $49,500 of the purchase price. This provision has a generous phase out: It doesn’t disappear until you reach between $250,000 and $260,000 of modified adjusted gross income for married couples and $125,000 to $135,000 for singles.

There is no limit to how many vehicles you bought in 2009. For example, if you bought two cars costing $35,000 each, assuming a 4% sales tax, you could deduct $2,800 on your 2009 tax return.

Non-itemizers get this break, too. They can add the sales tax amount to their standard deduction!

5. Optional state and local sales tax deductions have been reinstated. Instead of deducting state and local income taxes, you can elect to deduct the state and local sales tax you paid during 2009. You can either total up all of the actual sales taxes that you paid on your family’s purchases during 2009 or, alternatively, you can base your deduction on state-by-state tables approved by the IRS. Even if you use the IRS tables, you can tack on extra sales tax you paid for certain big-ticket items, such as purchasing a new car or boat last year.

6. Discharge of debt is not necessarily taxable. In most cases, a discharge of debt constitutes taxable income, unless an exception applies. Generally, the taxable amount is the difference between the debt’s principal balance and the amount used to satisfy the debt. For example, if a bank forecloses when you owe $300,000 on your home and then it sells the property for $250,000 in full satisfaction of the debt, you would normally owe income taxes on the $50,000 difference.

Individuals who had mortgage debt forgiven from 2007 through 2012 may be able to claim special tax relief. The first $2,000,000 of mortgage debt forgiveness is income tax-free if the debt is secured by a principal residence and if the mortgage was used to buy, build, or substantially improve your home. You must reduce the amount of your basis in the home by the excluded amount, but not below zero. This new tax exclusion does not apply if the discharge is not directly related to a decline in the property’s value or your financial condition.

Debt forgiven on second homes, personal property, business property, credit cards, or car loans does not qualify for the new tax-relief provision.
7. Taxpayers 65 or older should recheck their standard deduction. The standard deduction in 2009 for singles is $5,700. Those 65 and older can take $7,100. Married can claim $11,400. If one spouse is 65 or older, the standard deduction rises to $12,500. If both are 65 and older, then the amount for the standard deduction is $13,600.
8. Be careful not to overpay Social Security Taxes. If you received a paycheck from two or more employers, and earned more than $106,800 in 2009, you may be able to file a claim on your return for the excess Social Security tax withholding.
9. Don’t forget deductions carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.

10. Calculate your estimated tax payments for 2010 very carefully. Most computer programs will automatically assume that your income-tax liability for the current year is the same as the prior year. This is done in order to avoid paying penalties for underpayment of estimated income taxes for the current tax year. However, in many cases this is not a correct assumption, especially if 2009 was an unusual income tax year due to the sale of a business, unusual capital gains, exercise of stock options, or even winning big in Las Vegas or winning the lottery!
11. Check to see if your children are subject to the “Kiddie Tax”. Unfortunately, the potential benefits of the extension of the zero capital gains tax to lower bracket taxpayers in 2008-2010 will be severely restricted for many taxpayers with children. Just when you thought it was safe to transfer funds to your children, the Small Business and Work Opportunity Tax Act of 2007 has extended the dreaded “kiddie tax”, enacted to prevent parents from taking advantage of their children’s low tax rate.

The kiddie tax is a special rule that taxes a child’s unearned income (usually interest and dividends) over a threshold amount ($1,900 in 2009). The first $950 of unearned (investment) income is tax-free, the second $950 is taxed to child at the child’s income tax rate, and the unearned income over this threshold is taxed to the child at the parent’s highest marginal income tax rate. Remember that all earned income (usually wages) is taxed at the child’s income tax rate.
Children under 19 or full-time students under 24 (whose earned income is not in excess of half of his/her annual support) are also subject to the kiddie tax. Once a child turns 24, he or she is no longer subject to the kiddie tax on any income.

12. Recheck changes in the Gift Tax laws. The annual gift tax exclusion rose from $12,000 for 2008 to $13,000 for 2009. This allows you give up to $13,000 each to any number of people without triggering the gift tax. For example, if you gave 1,000 friends each $13,000 during 2009 this would result in giving away $1,300,000 with no gift tax liability at all. A husband and wife can give away up to twice the annual gift tax exclusion, or $26,000. There is also no limit on how much you can give a spouse gift-tax-free, as long as the spouse is a citizen. If you give more than the amount allowed on an annual basis, then you must file a gift tax return, form 709.
There are a few gifts that are not included as part of the annual exclusion. Tuition you pay directly to a school, rather than giving the money to the student and having him or her pay the tuition, is ignored by the gift tax rules. The same applies to medical bills you pay directly to a hospital, for example, on behalf of someone else, such as an adult child or friend.
13. Consider opening up a 529 plan. A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. It is important to understand the fees and expenses with a 529 plan. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence.
Withdrawals (including earnings) used for qualified education expenses – tuition, books and computers – are income tax free. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty. Investment earnings in 529 plans are not subject to the kiddie tax.
If you contribute to a 529 state college-savings plan, you can use up to 5 year’s-worth of annual exclusions all at once. Thus, you can contribute up to $65,000 (5 X $13,000) to a 529 plan to your grandson this year without triggering the gift tax, as long as you don’t make additional gifts to him in the next 4 calendar years. Please remember that your spouse can also make a contribution, which would then allow a total of $130,000 to be invested in one year. What a great way to start planning for college!
Another major benefit of the 529 plan is that you have control over who the eventual beneficiary is going to be should you change your mind in the future.
14. Review estate tax law changes. The following example illustrates the complexity and absurdity of the current tax laws relating to estates. A person’s net worth could be as high as $1,000,000 (also known as the exemption) on December 31st, 2001 and would not have any federal estate tax. Over the next nine years the exemption increased to $3,500,000 during 2009. Then, effective January 1st, 2010 you can now have an unlimited amount in your estate without paying any estate taxes. Although this sounds good at first, it’s not! Next year, on January 1st, 2011, the maximum amount you can have in your net worth without paying any estate tax goes back down to $1,000,000!
Although many people might celebrate this year with no estate taxes (at least for now), the problem is that the step-up in basis rules are modified as of January 1st, 2010 and only a limited amount of appreciated property will receive the step-up and the rest of your assets keep the same basis the decedent had before he passed away. The step-up in tax basis is a major tax break that affects many more people than the estate tax laws.
The good news – it appears that there is a good likelihood that Congress will change some of these rules in the near future. Let’s hope that Congress does the right thing and reinstates the step-up in basis rules and finally decides on a reasonable amount for the estate tax exemption.

Please note that this $3,500,000 is the exemption amount for federal estate taxes, and not for the state inheritance tax, which is usually different than the federal amount. Please check with your estate planning attorney to make sure that your estate planning documents are worded properly to take advantage of these 2 different sets of rules.

Take Advantage of Tax Credits

A tax credit is more valuable than a tax deduction; it reduces your income tax bill dollar for dollar compared with a tax deduction, which merely reduces the amount of income subject to tax. For example, a $1,000 tax credit will usually reduce your taxes by $1,000. A $1,000 tax deduction, if you are in the 25% tax bracket, would reduce your taxes by $250.
1. Homebuyer’s credit. If you bought a new home last year or signed a buy-new contract for one by April 30th, 2010, you could be eligible for a new tax credit. You must also close escrow by June 30th, 2010. The new housing law authorizes a tax credit for purchases by “first-time homebuyers”, defined as anyone who has not owned a principal residence for the previous 3 years. Therefore, some older individuals might also qualify even if they have owned a house in the past.

The tax credit is worth up to $8,000 or 10% of the cost of the home, but does not apply to the purchase of a residence costing more than $800,000. However, the credit must be repaid in certain circumstances. This tax credit is also refundable, meaning that even if a buyer doesn’t owe $8,000 of tax, he/she can claim the full benefit and receive a refund check.

The new law also authorizes a similar $6,500 credit for buyers who already own a home and is equal up to 10% of the purchase price of the residence costing no more than $650,000. To qualify, the buyer has to have owned and lived in the same home for 5 of the 8 years preceding the new home purchase and the new home must become the buyer’s principal residence.

Both of these credits phase out for individuals with a modified adjusted gross income of $125,000 or $225,000 for married filers.

Best of all, a homebuyer does not have to wait until they file their 2010 tax returns to reap the rewards. Even if the purchase is not completed until 2010, the credit can be claimed on either the 2009 or 2010 tax return.

There are a number of interesting twists to these new tax laws, including phase outs, new deadlines to qualify, and the tax years that may be used to generate the credit. As you can see, its complexity suggests you see a tax specialist in order to comply with all the rules.

2. Home-Energy tax credit. Homeowners can receive a credit of 30% of what they spent on qualifying improvements and residential energy property expenditures, with a maximum credit of $1,500 in 2009. The credit applies to improvements such as insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems.

From 2009 to 2016, you can also claim another completely separate federal income tax credit equal to 30% of expenditures to buy and install more exotic (and more expensive) energy-saving equipment for your home. Except for fuel cell equipment, there is no dollar limit on this credit, so big expenditures can translate into big credits which can carry on year after year through 2016. There are no income limits on this credit. And, you can even use it to reduce both your federal income tax liability and your AMT! For more information on this, refer to IRS form 5695, residential energy credits. In order to read more about which improvements may qualify for this credit, go to www.ase.org/taxcredits.

3. Making work pay tax credit. This credit is intended to offset an individual’s shares of FICA on the first $6,450 of earnings. This credit is the lesser of 6.2% of earned income, up to a top credit of $400 for individuals and $800 for married couples. This credit is phased-out at $75,000 for individuals and $150,000 for married couples.

4. Check to see if you qualify for a foreign tax credit. If your stock portfolio invests internationally, you may be entitled to claim a foreign tax credit for foreign income taxes on investment income paid by the investment company. This may reduce your U.S. taxes by the amount of tax paid by the investment to foreign governments. Unfortunately, this credit is often overlooked. Be sure to give your tax preparer the proper 1099 that reflects any foreign tax paid.

5. You may also qualify for the Alternative Motor Vehicle Credit. The IRS has a list of vehicles eligible for this credit, which can be up to $3,400. Check to see if your state offers tax credits as well. Find the updated lists of qualified vehicles at www.irs.gov/newsroom/articles/0,,id=157632,00.html.

6. There is still a child income tax credit of $1,000 for one child and $2,000 for two children. A taxpayer who has a dependent child under age 17 probably qualifies for the child tax credit. This credit in addition to the regular $3,650 exemption claimed for each dependent. Remember – the child tax credit is not the same as the child care credit. Many people are not aware that this tax credit is also deductible against the Alternative Minimum Tax! Unfortunately, the child tax credit still phases out when modified AGI reaches $75,000 for a single taxpayer and $110,000 for joint filers.

You may also be eligible to receive other credits such as dependent care credits. Please see your tax preparer for details.

Alternative Minimum Tax

There is actually a second federal income tax system (yes, we groan with you as we struggle to understand even the first complicated tax system). The second system may raise your income taxes higher than they would otherwise be. In 1969, Congress created a second tax system – the Alternative Minimum Tax (AMT) – to ensure that higher-income earners with high amounts of itemized deductions pay at least the minimum amount of taxes on their income. The AMT restricts you from claiming certain deductions and requires you to increase your taxable income. So you must figure the tax you owe under the AMT system and under the other “normal” system and then pay whichever amount is higher.

Taxpayers who face an Alternative Minimum Tax liability might be eligible for a Minimum Tax Credit (MTC). Ask your tax preparer if you have paid any AMT in the last few years—your credits may be refundable!

In Summary

As you can see there are many different strategies that can still be implemented in 2010 to reduce your 2009 tax liability. Unfortunately, all of this information can be overwhelming – that is an understatement!
I hope that all these tax laws and changes do not confuse you. We believe that taking a proactive approach is better than a reactive approach – especially regarding income tax strategies! Do not pay any more taxes than you legally have to! We will keep you posted about the different tax law changes that take place throughout this year. Thank you for allowing us to help you with your finances.
P.S. The upper incomes continue to bear a record share of the income tax burden. The top 1% of filers paid 40.4% of all federal income taxes, according to IRS data for 2007, the most recent year available. The highest 5% paid 60.6% of the total income tax. The bottom 50% of all filers paid only 2.9% of the total income tax bill. Their share is so low because Social Security taxes are not included in the figures and because many of these taxpayers get substantial tax relief from the earned income credit.

Note: The views stated in this letter are not necessarily the opinion of Comprehensive Asset Management & Servicing Inc., and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional change in government policy.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. ¬We suggest that you discuss your specific tax issues with a qualified tax advisor.

Sources: Small Business Tax Strategies (January 2008, February 2008, March 2008, April 2008, August 2008, November 2008, November 2009, December 2009), Journal of Accountancy (January 2009), Investment News (1/7/08, 6/2/08, 1/19/09), On Wall Street Magazine (January 2009),Kiplinger Tax Letter (12/28/07, 2/22/08, 7/25/08, 8/8/08, 9/5/08, 10/3/08, 10/31/08, 12/23/08, 1/9/09, 8/7/09, 10/2/09), Steve Leimberg’s Newsletter (1/21/08, 11/3/08, 12/5/08, 1/15/09), Tax Hotline Magazine (January 2008, February 2008, March 2008, April 2008, May 2008, June 2008), Inc. Guidebook (Vol. 1 No.7), Kiplinger’s Personal Finance (March 2008, December 2009), Trust & Estates Magazine (November 2008, January 2009), J.K. Lasser’s Tax Letter (September 2007, February 2008), Senior Market Advisor Magazine (February 2008), Kiplinger’s Retirement Report (February 2008), Wealth Manager Magazine (December 2007, February 2008, September 2008), Wall Street Journal (1/9/08, 5/3-4/08, 8/6/08, 12/2/08, 12/3/08, 12/27-28/08,1/7/09, 1/8/0p, 9/3/09), Money Magazine (April 2008), Money Adviser Magazine (January 2008), National Underwriter Magazine (10/20/08, 12/1/08), Tax Savings Report (October 2008, November 2008, September 2009, October 2009), Business Week (November 2008), CCH Tax Briefing (7/30/08), Bottom Line Wealth Magazine (October 2008), Ed Slott’s IRA Advisor (January 2009, November 2009), Profitable Investing (September 2009), Forbes Magazine (3/16/09), Fortune Magazine (5/11/09)