When it comes to your personal finances, 2008 may be a year you'd rather forget. But a little reflection on last year's tax changes could be the springboard you need to save taxes in 2009.
New tax rules for homeowners
Last October, with passage of the Emergency Economic Stabilization Act of 2008, Congress extended several important tax provisions that were set to expire. For example, a homeowner tax break in the Mortgage Forgiveness Debt Relief Act of 2007 would have ended after 2009, but instead remains in effect through 2012. This rule allows you to exclude from taxable income up to $2 million of forgiven mortgage debt, such as that resulting from home foreclosure or loan restructuring. Now there is no longer any tax-driven pressure to restructure your loan before the end of 2009.
HOME PURCHASE CREDIT. If you are looking to buy a house in 2009, there is still time to take advantage of the home buyer's tax credit. You can receive a tax credit of 10% of the purchase price (up to $8,000) if you buy your home before November 30, 2009. There are a few catches, however. There are income limits, and you cannot have owned a principal residence during the previous three years. If you own the home for 36 months, the credit does not have to be repaid to the government.
PROPERTY TAX DEDUCTION. If you already own a home, but usually do not have enough deductions to itemize on your tax return, there is good news for you, too! Congress extended through 2009 a rule allowing nonitemizers to deduct up to $1,000 ($500 for single filers) in real estate property taxes in addition to the regular standard deduction amount.
HOME SALE CHANGE. In 2009, the tax treatment changes for vacation homes converted to personal residences. Beginning this year, the popular $250,000/$500,000 taxable gain exclusion for sales of personal residences won't apply for gain attributable to periods during which the home was used as a vacation home or a rental property. The adjustment to the amount of gain that can be excluded is based on "nonqualified use periods" beginning January 1, 2009.
College and charity tax breaks
TUITION DEDUCTION. The Emergency Economic Stabilization Act of 2008 also extended the tax deduction for higher education costs. As much as $4,000 in tuition and fees incurred by the taxpayer, spouse, or a dependent can be written off from taxable income. However, if your adjusted gross income exceeds $130,000 filing jointly ($65,000 filing single), the deduction is reduced.
IRA TO CHARITY. Remember the charitable IRA rollover for taxpayers 70½ years old or older? It's back! Congress reinstated the rule that allows older taxpayers to donate to charity up to $100,000 directly from their IRA. The withdrawal is not included in taxable income, and it does not qualify as a deductible contribution to charity. However, the charitable rollover satisfies the required minimum distribution (RMD) rules, making this a tax-advantaged way to benefit your favorite charity. The RMD rules are suspended for 2009.
Businesses as well have an added incentive to make charitable contributions in 2009. Enhanced deductions will again be given to businesses that donate qualified food to charities or books and computer equipment to schools.
A silver lining to the economic downturn
CAPITAL LOSSES. Did last year's economic woes hammer your portfolio or business? Capital losses resulting from the sale of assets such as stocks and bonds can be used to offset capital gains and up to $3,000 of ordinary income per year. Any capital losses left over from 2008 can be carried forward to offset capital gains in 2009 – something to think about if the stock market rebounds this year.
NOLs. Qualifying small business owners who incurred a net operating loss (NOL) in 2008 can offset those losses against business income. In fact, a 2008 NOL can be carried back up to five years to a previous profitable year's tax return, providing a more immediate tax refund.
Incentives to go green
ENERGY. Congress reinstated several laws in 2008 and 2009 that provide tax breaks to individuals and business owners who purchase energy efficient equipment. Most taxpayers stand to benefit from the rule that provides as much as $1,500 in tax credits for energy saving home improvements such as qualified insulation, exterior windows, or doors. Businesses that invest in energy efficient commercial buildings could also reap tax savings.
The tried and true
Some solid tax-cutting strategies remain the same from one year to the next. Maximizing your 2009 retirement plan contribution is a good place to start. The annual 401(k) or 403(b) elective deferral limitation increases from $15,500 to $16,500 this year. Those who have reached age 50 by the end of 2009 may contribute an additional $5,500.
If your employer provides a health savings account or a flexible spending account, review your 2008 health or dependent care expenses to make the most of these tax-advantaged plans for 2009. Otherwise, you might be leaving money on the table.
Now is also a good time to review your income tax withholding or estimated tax payments. Anticipated changes to your dependents, income, or deductions might call for an adjustment to your tax withholding. Failure to make these changes now may result in tax penalties if you come up short, or unnecessarily tie up cash if you overpay.
Get an early start
The earlier you begin your 2009 tax planning the better. It's important that you take taxes into account before making financial decisions in your personal and business affairs this year. For tax-cutting guidance under the ever-changing rules, give us a call.
NOTE: This newsletter is issued annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For details and guidance in applying the tax rules to your individual circumstances, please contact us.
PADRO & Company, P.A.
