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Year-End Tax Planning for 2009

Consider Portfolio Moves Before Tax Laws Change

 Alexandra Armstrong CFP, CCPS and Karen Preysnar  CFP As we approach the end of 2009, now is an ideal time to review your tax situation. In the past we’ve recommended deferring taxable income to the following year to minimize the current year’s tax bill. This year we suggest the opposite, as it is our opinion that taxes will be higher next year than this year.

So if you agree with us that taxes on long-term capital gains may be 20 percent next year versus 15 percent this year, you may want to take some capital gains this year instead of next. By the same token, if you’re in the top income tax bracket, it might be to your benefit to take taxable income this year versus next if you have a choice. First, let’s review the current tax rates.

Federal Tax Rates

Federal tax rates in 2009 range from 10 percent to 35 percent (see table, below). They aren’t scheduled to change in 2010 under current law, but as we stated above, we think some type of increase is likely. 

Federal tax rates are scheduled to increase in 2011 as a result of the expiration of the tax cuts implemented by the Bush administration in 2001. Unless current law is changed, the four highest federal tax rates will automatically rise in 2011, with the top rate reverting to 39.6 percent.
Long-term capital gains and qualified dividends are taxed at a maximum federal rate of 15 percent in 2009. For taxpayers in the 10 percent or 15 percent tax bracket, this type of income isn’t taxed at all. But if a taxpayer in one of these brackets receives additional long-term capital gains or qualified dividends that cause taxable income to exceed the upper end of the 15 percent bracket, that additional income will be taxable at a rate of 15 percent. The favorable treatment of long-term gains and qualified dividends is scheduled to remain in effect through 2010 under current law. Starting in 2011, long-term capital gains will be taxed at rates ranging from 8 percent to 20 percent, depending on your level of income and your holding period. Dividends, however, will be treated as ordinary income, and you’ll pay tax on that income at your regular tax rate.
Over the last several years, you may have shifted your investments into dividend-paying stocks or mutual funds to take advantage of the low tax rate. But since under current law this income will be taxed at up to 39.6 percent in 2011, you may want to start reviewing your investment strategy now to give yourself plenty of time to implement any changes you decide to make. For example, an investor holding high-yielding stocks who doesn’t really need the income may want to shift some of his portfolio into growth stocks before 2011. That brings us to the topic of capital gains.

Capital Gains and Losses

If your capital losses exceed your capital gains, $3,000 is the maximum you can deduct in any one year against your ordinary income. Many investors claimed large capital losses on their 2008 tax returns, and if capital losses exceeded capital gains by more than $3,000, this resulted in a carryforward capital loss. As part of your 2009 tax planning, you should check your 2008 tax return to see whether you have a carryforward loss. Some tax preparers give you a summary of carryforward information that clearly spells out the
figure for you. Otherwise, look at Part III of your federal Schedule D form. If there’s a loss on Line 21 that exceeds $3,000, subtract $3,000 from that figure to determine the loss carried forward to 2009. If there’s no loss on Line 21, if the loss is $3,000 or less or if you didn’t need to file a Schedule D, you don’t have a carry-forward loss.
Next, check the year-to-date gains and losses you’ve realized in your nonretirement accounts. Net all your short-term gains and losses, and likewise net all your long-term gains and losses. Your carryforward loss from 2008 may comprise both short-term and long-term losses, so be sure to net them accordingly against your short-term and long-term 2009 gains and losses. Armed with this information, you’ll know what position you’re currently in and can plan accordingly for any additional transactions you’re considering between now and the end of the year. The last trading day of the year is Thursday, Dec. 31, and trades placed on that day will be reported on your 2009 tax return even though they’ll settle in 2010.

Charitable Donations

If you find yourself with a large capital loss so far this year and you have low-cost-basis stock currently selling at a gain, you may be tempted to sell some of your stock if it won’t result in any additional taxes. This is fine, but also keep in mind that if you have a capital loss, it can be carried forward indefinitely. In other words, it won’t go to waste if you don’t use it up right away. Therefore, we think it makes sense to use appreciated stocks (or other securities) rather than cash to make any significant donations. This way you won’t use up your capital loss needlessly. If you plan to contribute securities, we suggest you do so now rather than waiting until the last minute because it can take longer to process this type of transaction than you might think.
In most cases, the date of your donation is the date the securities are received in the charity’s account. But if you mail a stock certificate directly to a charity, the date of your gift is the postmark date.
If you donate appreciated securities, you must have held them for more than one year to deduct the full market value. If you donate securities you’ve held for one year or less, your deduction is limited to the cost of that asset. The market value of your donation is based on the average of the high and low trading prices on the date of your donation. If the donation is made on a day when no trades occurred, use the average of the high and low selling prices on the nearest trading days both before and after the date of the donation.
Gifts to Family Members or Other People

Unlike charitable donations, gifts you make to individuals aren’t deductible. The good news, however, is that your gift recipient isn’t taxed on the gift, and you don’t have to pay a gift tax unless your taxable gifts exceed $1 million. You can give as much as $13,000 to any individual in 2009 without having to file a gift tax return. If your gift to any one individual exceeds this amount, you’ll need to file a gift tax return to report the gift even if gift taxes don’t need to be paid. Spouses can give up to $26,000 to another person this year, but if either spouse gives more than $13,000, a gift tax return needs to be filed in order to split the gift.
If you give stocks or other securities, the person who receives your gift generally acquires your cost basis. Therefore, you should provide recipients with the dates of purchases and the cost for the shares you’re giving them so that they’ll have this information if they sell them.
If your gift is made by personal check, the recipient has to actually cash the check before the end of the year for the gift to count for 2009. We suggest you let the recipient know he should cash your check promptly. If you use a certified check for making your gift, you can avoid this potential problem.

Required Minimum Distributions

The required minimum distribution rules were waived in 2009, but some people chose to take their distributions anyway. Other people may have received a distribution automatically whether or not they really wanted or needed it. The general rule is that you cannot roll over an RMD. In September, however, the Internal Revenue Service announced a special rule for 2009 that allows anyone who received an RMD in 2009 to roll it over; that is, redeposit the RMD back into the retirement account. To avoid being taxed on the RMD, you must complete the rollover by the later of Nov. 30, 2009, or 60 days after receipt of the distribution.

Contribute to Your Retirement Account

Contributions to employer-sponsored plans such as 401(k)s and 403(b)s need to be made through payroll deductions, but there’s still time to increase your contributions for the year if you’re not already contributing the maximum. The basic limit for 2009 is $16,500, but taxpayers who will be 50 years old by the end of 2009 can contribute an additional $5,500 for a total of $22,000.
Taxpayers who want to establish a solo 401(k) plan must do so by the end of the year if they operate their business on a calendar year, but the plan doesn’t have to be fully funded until the due date of your tax return, including extensions. Contributions to this type of plan can be as high as $54,500 for 2009.
You have more leeway with IRAs and SEP-IRAs. Traditional and Roth IRAs can be established and funded as late as April 15, 2010. With SEPs (Simplified Employee Pension IRAs), you have until the due date of your tax return, including extensions. But we suggest you set up and fund your IRA or SEP-IRA as soon as possible so that your money can begin to grow on a tax-deferred basis.

Special Credits and Deductions

A variety of credits and deductions are available this year as part of the 2009 tax stimulus bill. Remember, a $1 credit is worth more than a $1 deduction — a credit offsets your actual tax dollar for dollar whereas a deduction only reduces your income dollar for dollar.
One of the big credits this year is the first-time homebuyer credit. If you buy a qualified personal residence this year, you haven’t purchased a home within the last three years and settlement occurs by Nov. 30, 2009, you can claim a credit of 10 percent of the purchase price, up to a maximum of $8,000. Phaseout of the credit starts at adjusted gross income of $75,000 for individuals or $150,000 for couples filing jointly. Note that the credit has to be paid back if you don’t live in the home for at least three years.
There’s a new education tax credit called the American Opportunity Credit of up to $2,500 in 2009 and 2010. This is an improved version of the Hope Scholarship Credit. Phase-out of the credit begins when AGI exceeds $80,000 for single taxpayers or $160,000 couples filing jointly.
Several tax credits are available to homeowners for energy-efficient improvements made in 2009 or 2010. The credit for most improvements is 30 percent of cost with an aggregate cap of $1,500. There’s no dollar cap, however, on geothermal heat pumps, solar panels, solar water heaters or small wind-energy systems, and credits for these items are available through 2016. For windows or doors placed in service on or after June 1, 2009, check the requirements for the credit because standards were tightened.
Individuals who purchase a new vehicle in 2009 will be eligible to deduct the sales or excise taxes attributable to the first $49,500 of the purchase price of each vehicle purchased. The deduction can be taken “above the line,” meaning it can be deducted whether or not you itemize your deductions. The deduction is phased out when an individual’s AGI exceeds $125,000 or when a married couple’s AGI exceeds $250,000.
We’ve touched on several topics to help you with your 2009 tax planning, but there are still many other important issues that we didn’t have the space to mention. Therefore, we suggest you review your overall tax situation with your financial planner or tax adviser now to make sure you’ve covered all your bases.

Websites of Interest
Energy Star program homepage

Alexandra Armstrong is co-author of the fourth edition of On Your Own: A Widow’s Passage to Emotional and Financial Well-Being. She is a Certified Financial Planner practitioner and chairman of Armstrong, Fleming & Moore, Inc., a registered investment advisory firm in Washington, D.C. Securities are offered through Commonwealth Financial Network, member FINRA/SIPC. Investment advisory services are offered through Armstrong, Fleming & Moore, Inc., an SEC-registered investment adviser not affiliated with Commonwealth Financial Network.
Karen Preysnar, Certified Financial Planner practitioner, co-author of this article, is vice president in charge of financial planning at Armstrong, Fleming & Moore, Inc., and a registered representative with Commonwealth Financial Network.
Individuals should contact a financial planner, tax adviser or attorney when considering these issues. Commonwealth Financial Network does not give tax or legal advice. Consult your personal adviser before making any decisions. The authors cannot answer individual inquiries, but they welcome suggestions for article topics.

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