To Our Clients and Friends:
With tax law constantly changing, new tax-savings strategies are always emerging and this year is no exception. In this newsletter we will cover several tax planning opportunities including estate planning and gifting and some of the significant provisions included in the recently enacted American Recovery and Reinvestment Act of 2009 (the Recovery Act).
Tax Planning for Individual Taxpayers
? Estate Planning - Estate planning is now more important than ever based on lower asset prices and relatively low interest rates. Moving assets that have depreciated values is an excellent way to reduce estate taxes. We strongly encourage you to have your estate plan reviewed and updated.
? Gifting - You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. For 2009 you can give $13,000 to an unlimited number of individuals. A husband and wife together can gift up to $26,000 to an unlimited number of individuals each year without gift tax.
? Section 529 Plans - Consider investing in a Colorado state qualified tuition program. Payments or contributions made to a 529 plan administered by CollegeInvest can be deducted on the Colorado income tax return. Also an account owner can accelerate five years of gifts to a Section 529 College Savings Plan at one time. This is a great way to fund college for your children and grandchildren and also an excellent estate planning tool.
? Power of Attorney - A general power of attorney should be a staple of every estate and financial plan. Be sure that the document authorizes your named representative to make tax planning decisions for you including the ability to make gifts, create and fund trusts, represent you before the IRS and other tax authorities and manage your retirement accounts.
? Charitable Contributions - Instead of contributing cash to your favorite charity, consider donating appreciated stock. Donating appreciated stock allows you to deduct the full fair market value of the stock without paying tax on the capital gain.
? Capital Gains and Losses - With capital gains tax rates expected to increase next year, it may be advisable to recognize gains this year. On the flip side, if you are contemplating harvesting losses, remember to avoid the "wash sale rule" in which a security is sold at a loss and a substantially identical security is purchased within 30 days. The subsequent purchase could occur before or after the security is sold, creating a 61-day window that is used to identify wash sales. When a wash sale occurs, the loss is deferred until the replacement security is sold. Note the wash sale rule also applies if you sell a security at a loss in your individual account and repurchase it within the 61-day window in your IRA account.
? Making Work Pay Credit - Under the Recovery Act, working individuals will generally get a refundable federal income tax credit of up to $400 ($800 for joint filers). Instead of getting a separate check from the IRS your employer will automatically adjust your withholding so that you get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that you don’t have too little tax withheld. If you are self-employed, you can receive the credit in advance by reducing your estimated tax payments. The credit is phased out for joint filers with modified adjusted gross income (AGI) between $150,000 and $190,000 and other taxpayers with modified AGI between $75,000 and $95,000.
? Sales Tax Deduction for vehicle purchases - As a part of the Recovery Act, there is a new deduction for state and local sales taxes paid on the purchase of new cars, light trucks, motor homes or motorcycles after February 16, 2009 and before January 1, 2010. The deduction is generally available regardless of whether you itemize deductions or claim the standard deduction. The deduction is limited to the tax paid on up to $49,500 of the purchase price of the vehicle and is phased out for joint filers with modified AGI between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.
? First Time Homebuyer Credit - Under the Recovery Act, a refundable tax credit of $8,000 is available to first time homebuyers for qualifying purchases through November 30, 2009. The credit can be claimed in either 2009 or in 2008 on an amended 2008 return. You are considered a first-time homebuyer if you (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. The credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers).
? AMT Relief - The alternative minimum tax (AMT) was originally enacted to ensure that wealthy individuals did not escape paying taxes. Over the years the AMT has wound up affecting many middle-income taxpayers. The Recovery Act provides AMT relief for 2009 by increasing the exemption amounts above last year's levels and allowing nonrefundable credits to offset AMT as well as regular tax.
? College Tax Breaks - The Recovery Act expands tax breaks for individuals seeking a college education. For 2009, it gives taxpayers a new "American Opportunity" tax credit of up to $2,500 of the cost of tuition and related expenses paid during the year. The credit is available for the first four years of post-secondary education in a degree or certificate program. The credit is phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The Act also expands the definition of qualified education expenses relating to Section 529 education plans to include computer technology and equipment, as well as Internet access and related services.
? Colorado Modifies Capital Gains Subtraction - For 2009, Colorado taxpayers are allowed to subtract certain net capital gains earned from Colorado sources to the extent the gains are included in their federal taxable income. Under the general rule, the gains must be earned from the sale of either real or tangible property located in Colorado or stocks or ownership interest in a Colorado company. The taxpayer must have acquired the asset after May 8, 1994 and must have owned it for at least five years. For transactions occurring on or after January 1, 2010, new legislation eliminates the subtraction for the sale of stock or an ownership interest in a Colorado company and limits the subtraction to $100,000 of net capital gains earned on real and tangible personal property for any single tax year. Taxpayers who are planning to sell a Colorado company may want to consider accelerating the sale into 2009 rather than 2010. Also, taxpayers who anticipate having capital gains on Colorado property over $100,000 may want to accelerate the gains into 2009 in order to qualify for the entire capital gain subtraction.
Tax Planning for Businesses
? Liberal Expensing Limits - The Recovery Act continues for another year the enhanced expensing rules for capital purchases. For 2009, a business may purchase and immediately expense up to $250,000 of qualifying assets. The expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets.
? Bonus First Year Depreciation - The Recovery Act extends for another year the ability for businesses to take an extra "bonus" depreciation deduction for the first year new assets are placed in service. The bonus deduction generally equals 50% of the cost of qualified property (most types of tangible property other than buildings and their structural components) acquired and placed in service during 2009.
? Deferred Tax on Debt Forgiveness Income - A business generally will wind up with debt discharge income if it reacquires its debt for less than the outstanding amount of the debt. For debt that's reacquired in 2009, the Recovery Act permits the tax that's owed on such debt discharge income to be paid over five years, beginning with 2014.
? Longer NOL Carryback Period - In general, net operating losses (NOLs) may be carried back two years and forward 20 years. For NOLs arising in 2008, the Recovery Act permits small businesses to elect to increase the NOL carryback period from two years to three, four, or five years. A small business for this purpose is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less for the three-year period ending with the year in which the loss arose. The longer NOL carryback period gives small businesses that experienced losses the ability to get immediate refunds of taxes paid in earlier years.
? Reduced Estimated Taxes in 2009 - You may qualify for a reduction in your estimated tax payments for 2009. Generally, for 2009, most taxpayers pay estimated tax of at least 100% of the tax due on their 2008 federal tax return. (110% for higher income taxpayers.) For 2009, qualifying individuals would only have to pay estimated tax of 90% of the tax due on their 2008 return. An individual qualifies for this relaxed estimated tax payment rule only if AGI on the 2008 return is less than $500,000 ($250,000 if married filing separately) and at least 50% of the gross income shown on the 2008 return was from a small trade or business (one that employed no more than 500 people).
? Limited Subsidy for COBRA Continuation Coverage - The Recovery Act provides an opportunity for involuntarily terminated employees to obtain COBRA continuation coverage (generally health care coverage) at more affordable rates but at the added paperwork expense of employers. The Act provides a 65% subsidy in the form of a reduction in the amount of COBRA premiums paid by the former employee for up to 9 months for workers who have been involuntarily terminated between September 1, 2008 and December 31, 2009. The employer must pay the 65% premium payment on behalf of the employee, but the company then gets a reimbursement of the payment by either offsetting its payroll tax deposits or claiming the payment as an overpayment at the end of the payroll quarter on Form 941. Terminated workers must be notified of their right to a COBRA coverage subsidy. The payment is not taxable when received, but higher income recipients will have to pay back part or all of it at tax return time.
