Ask your tax professional to help you lay out a tax plan for 2009.
Changes for 2009
There are a number of tax law changes that may affect your 2009 tax planning. Many of the deductions and credits are subject to income limits and phase out rules. Below are some of the more significant changes for individuals.
– Required minimum distributions for IRAs and defined contributions plans (401k, 403b, etc.) are waived for 2009 to help retirees recover losses incurred from market volatility over the last several months.
– The Making Work Pay Credit is an income tax credit equal to the lesser of 6.2 percent of one’s earned income or $400 ($800 for married joint filers).
– The First Time Homebuyer Credit is increased to $8,000 and repayment is not required after 36 months of ownership.
– New vehicles purchased after February 17 for the rest of 2009 are subject to an “above the line” deduction of state and local sales or excise tax. This deduction directly reduces gross income. Only the sales tax on the first $49,500 of a vehicle purchase price is allowed.
– The American Opportunity Tax Credit increases the Hope Education Tax Credit from $1,800 to $2,500.
Get ready
Setup a tax filing system and as you receive tax related receipts or information during the year, put it in the folder. When you make tax related payments or contributions, write a check or get a receipt, so that you have written documentation of the payment.
Determine where
you are
Make a copy of your 2008 Form 1040 and pencil in estimates of your 2009 income. If you have a business or own rental real estate, estimate your full year income and expenses for 2009. Do you anticipate that your income will increase or decrease in 2009?
Estimate your itemized deductions for 2009. Will they increase or decrease for this tax year? Pencil in your total deductions on your Form 1040 and subtract it from your adjusted gross income (AGI) to determine your taxable income.
Use the tax tables to determine your estimated tax. Subtract any applicable credits from your total tax. Using your pay stubs, estimate your withholding for the year and add quarterly tax payments. Subtract your payments from the total tax to determine the amount of your overpayment or tax due. This is your first pass estimate for your 2009 taxes. Is this where you want to be or are there opportunities to make some changes that can reduce your tax burden?
Managing your tax burden
The first place to look to lower your tax burden is in the section, “adjustments to gross income.” These adjustments can lower total income. Some of the more common adjustments are:
– Health Savings Accounts
– Qualified retirement plans and IRAs
– Student Loan interest
– Alimony payments
Taking advantage of many of the “adjustments to gross income,” requires advance planning.
The next area to look to lower your tax burden is in Schedule A, Itemized Deduction, which can reduce taxable income on a dollar for dollar basis.
– Medical and dental expenses – Expenses must exceed 7.5 percent of AGI.
– Taxes you paid – State and local income taxes, real estate and personal property.
– Interest Expenses – Home mortgage interest, points and investment expense interest.
– Charitable contributions – Both cash and non-cash contributions. Non-cash contributions such as clothing, household goods and appreciated securities can be deducted at their fair market value.
– Miscellaneous Deduction must exceed 2 percent of AGI.
The final area to examine is the tax credit section. Tax credits are more valuable than deductions, since credits reduce taxes owed on a dollar for dollar basis. Some of the more commonly used tax credits are:
– Child and dependent care credit
– Education Tax Credits
– Residential Energy Credits
– Child tax credit of up to $1,000 for each qualifying child
Many of the tax credits have income limitations and phase-out rules and require additional tax forms to qualify.
Michael G. Shinn, CFP, Registered Representative and Advisory Associate of and securities offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or send your comments or questions to shinnm@financialnetwork.com. © Michael G. Shinn 2009. Neither Michael Shinn nor Financial Network provides tax advice. Please consult a tax professional before implementing any strategy.
