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Think It’s Too Early to Plan for April 15, 2010?
Scott F. Usher, MST, CPA
Senior Manager, Tax Services
June 15, 2009
No battle plan survives contact with the enemy, according to Colin Powell. Unfortunately, the same can generally be said of your tax plan―which is subject to damage from changing legislative and economic realities. But the fact that you may have to adapt your plan during the year to reflect such altered circumstances is no reason not to have one.
This year, there are quite a number of new or expiring tax credits and deductions at state and federal levels that could have a significant impact on your tax liability. Many of these incentives―federal tax credits for home improvements, for example―are based on potentially long lead-time activities, so it's important to plan for them well in advance of the end of the year.
The following are some of the more important tax changes to consider when evaluating your tax situation for 2009 and beyond.
Federal Residential Energy Tax Credits
 You can earn a residential energy property credit of up to $1,500 on your federal income tax return for certain energy-efficient improvements you make to your home during 2009 and 2010. The credit is equal to 30 percent of qualifying improvements―including certain energy-efficient exterior windows and doors, skylights, insulation, and energy-efficient heating and cooling systems.
You may also be eligible for a federal residential energy-efficient property credit of 30 percent on purchases of alternative-energy equipment, such as a solar hot water heater, wind turbine, or geothermal heat pump.
Federal Deductions for State and Local Taxes
State and local real property taxes of up to $500 ($1,000 for married individuals filing jointly) are deductible as an additional standard deduction on your 2009 federal income tax return―a benefit for taxpayers who don't itemize.
For 2009 only, if you itemize deductions on your federal return, you have the option of deducting state and local general sales taxes instead of state and local income taxes.
If you purchase a new qualified motor vehicle from February 17, 2009, through December 31, 2009, there is a federal non-itemized deduction for the state and local sales and excise taxes. The deduction is not restricted to hybrid purchases, although it is limited to the taxes paid on up to $49,500 in purchase price and phases out for higher-income taxpayers. (You cannot take both the general sales tax deduction and this sales tax deduction for a new vehicle purchase, so the benefit may be limited for most Washington State taxpayers.)
Federal Hybrid and Alternative-Fuel Vehicle Credits
Beginning in 2009, the federal hybrid tax credit is available to you even if you're subject to the alternative minimum tax (AMT). If you purchase a qualified fuel cell motor vehicle, advanced lean-burn technology motor vehicle, qualified hybrid motor vehicle, or qualified alternative fuel motor vehicle, the amount of your credit depends on the type of vehicle you buy and, in some cases, the manufacturer and model.
Buy a qualified electric-drive low-speed vehicle, motorcycle, or three-wheeled vehicle after February 17, 2009 and before January 1, 2012, and you may be eligible for a 10 percent tax credit―up to a maximum credit of $2,500 per vehicle.
If you convert any motor vehicle into a qualified plug-in electric drive motor vehicle after February 17, 2009 and before January 1, 2012, you're also eligible for a 10 percent credit― up to a maximum of $4,000.
Washington State Incentives for Hybrid and Alternative Fuel Vehicles
If you purchase or lease a qualifying new passenger car, light duty truck, or medium duty passenger vehicle in 2009 or 2010, your purchase is exempt from Washington State's sales and use taxes. To claim the tax exemption, you must retain all receipts and other records necessary to validate your eligibility.
Alternative Minimum Tax
The AMT exemption amounts for 2009 were increased to $46,700 for single taxpayers and $70,950 for married couples filing joint returns and for surviving spouses. These amounts were $46,200 and $69,950, respectively, for 2008―but had been scheduled to return to the significantly lower 2000 exemption amounts.
Federal Education Deductions and Credits
To make college more affordable the Hope tax credit has been enlarged and renamed the American Opportunity tax credit. The maximum amount of the credit for 2009 and 2010 is $2,500 per year for the first four years of college. The actual amount of the credit is calculated based on 100 percent of the first $2,000 of tuition and related expenses (including books) and 25 percent of the next $2,000 of tuition and related expenses.
This credit phases out for higher-income taxpayers, but the phase-out is higher than was the case for the Hope credit, providing a benefit to taxpayers with somewhat higher incomes.
For 2009 and 2010, computers and computer technology qualify as "qualified education expenses" for 529 college savings plans.
First-Time Homebuyers Credit
For homes purchased on or after January 1, 2009 and before December 1, 2009, qualified first-time homebuyers are eligible for a credit equal to 10 percent of the purchase price, up to a maximum credit of $8,000. You can qualify as a first-time homeowner as long as you haven't owned a principal residence in the U.S. during the three years before your home purchase. If you are married, both you and your spouse must meet this requirement, and certain income limitations apply.
IRAs
If you're at least age 70½, you can roll over up to $100,000 from your IRA to a qualified charity during 2009 on a tax-free basis.
If you are subject to the required minimum distribution (RMD) rules, you do not have to take a distribution for 2009.
For 2009, you can convert an existing traditional IRA (deductible or nondeductible) to a Roth IRA only if your modified AGI is not more than $100,000, and your filing status is not married filing separately. Starting in 2010, you can convert a traditional IRA into a Roth IRA regardless of your filing status and how high your income is.
Normally, the full amount of the income resulting from a conversion has to be included on your return for the year of the conversion. However, a special benefit applies if you convert your IRA in 2010: Unless you elect otherwise, you can spread the income from a 2010 conversion (and pay the resulting income taxes) over the following two years―i.e., 2011 and 2012.
Deductions for Purchases of Business Property
The increased maximum §179 deduction of $250,000―and beginning phase-out amount of $800,000―was extended through tax years beginning in 2009, but will drop significantly for 2010. The deduction applies to equipment and other depreciable business assets that were bought and placed in service during the year.
The first-year bonus deprecation option was also extended, through December 31, 2009. This option allows you to depreciate 50 percent of the adjusted basis of qualified new business property, after subtracting any section 179 deduction. The property must have been purchased and placed in service during the year.
These are only a few of the many tax considerations that can reduce your tax liability for 2009 and beyond. Your Bader Martin tax advisor can assist you in creating a comprehensive tax-minimization strategy.
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