2009 and Beyond: A Challenging Time for Tax Planning


By Matt McKinnon

Given the unprecedented state of the economy since mid 2008 and the recent administration change in Washington, tax planning will become even more critical, especially this year. Because of the significant recent tax law changes, no deduction should be overlooked and all available credit(s) should be taken to lower this year's tax bill. Managing the recognition or deferral of income will also be important in balancing your effective tax rate between 2009, 2010, and beyond.

Tax breaks set to expire at the end of this year include:

For individuals– the itemized state and local sales tax deduction; the $4,000 higher education tuition deduction; the additional standard deduction for real property taxes; and the above-the-line $250 teachers’ classroom expense deduction.

For businesses– the increased benefits related to capital expansion. Bonus Depreciation and the enhanced Section 179 expense limits were intended to encourage capital investment, and are likely headed for extinction.

Accelerating qualifying expenses into 2009 to take advantage of these expiring provisions, rather than incurring them early in 2010, might make a significant difference in your overall tax bill.

As we approach year-end, it is important to consider the use of losses and the proper matching of losses with gains. Knowing the differences in types (ordinary, passive, "at-risk," capital, and Code Section 1231, for example) and acting before year-end to match them correctly can mean significant tax savings. In addition, the general rule of pre-paying certain expenses before year-end, such as real estate taxes or mortgage interest, might not translate into a larger deduction this year, as more and more taxpayers are subject to the Alternative Minimum Tax (AMT).

Changes on the horizon for 2010 and beyond that should be considered this year include:

IRA to Roth IRA conversion: In 2010, the $100,000 income limitation will be no more. The lifting of this restriction has many individuals already planning to make the conversion in 2010. Some individuals, however, might find a conversion more beneficial before the end of 2009, when the value of their accounts, and the taxable income that must be recognized, could be lower than 2010 values.

Increase in tax rates: The Obama administration has proposed to increase the income and capital gains tax rates on single individuals with incomes of more than $200,000 and married couples with incomes exceeding $250,000, effective for tax year 2011. Based on this proposed change, following the traditional tax-planning concept of deferring income into next year might not work well for 2009. Deferring too much income into 2010 could result in overloading income next year, which could make it more difficult to shift income from 2011 to 2010 to escape the expected higher rates in 2011.

Taxpayers should maintain an open dialogue with their advisors, and provide information sooner rather than later. With the expiration of certain tax benefits on December 31, 2009, it is important to act now.

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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