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2010 TAX YEAR UPDATE

The changes identifed below will impact 2010 income tax returns for individual taxpayers:

Individual Income Tax Reciprocity with Wisconsin ends effective January 1, 2010

Minnesota will end individual income tax reciprocity with Wisconsin effective January 1, 2010. As a result, Minnesota and Wisconsin residents who work across the border must file returns in both states for 2010 and beyond if they meet minimum filing requirements.

This change does not impact 2009 income tax returns for individual taxpayers.

Social Security Wage Base Remains at $106,800 for 2010

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2010 remains unchanged at $106,800.

Most Retirement Plan Dollar Limitations Remain Unchanged for 2010

The Internal Revenue Service has announced the cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2010. Most of the dollar limitations for 2010 have not changed from the limitations for 2009. Click here to view retirement plan dollar limitations.

YEAR END TAX PLANNING

As 2009 draws to a close, there is still time to reduce your 2009 tax bill and plan ahead for 2010. The following highlights several potential tax-saving opportunities for you to consider:

Retirement Savings Options

Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2009 is $5,000. For 2009, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals.

Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2009, the AGI phase-out range for deductibility of IRA contributions is between $55,000 and $65,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

In addition, provided certain income requirements are met, an individual will not be considered an “active participant” in an employer plan simply because the individual's spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $166,000 to $176,000 for 2009. Above this range, no deduction is allowed.

Roth IRA: This type of IRA permits nondeductible contributions of up to $5,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59 1/2. Distributions may be made earlier on account of the individual's disability or death. The maximum contribution is phased out for persons with an AGI above certain amounts: $166,000 to $176,000 for married filing jointly, and $105,000 to $120,000 for single taxpayers (including heads of households); and between $0 and $10,000 for married filing separately who lived with the spouse during the year.

Roth IRA Conversion Rule: Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.

Repeal of Income Limitation on Roth Conversion Starting in 2010: Prior to 2010, a taxpayer could only make a Roth IRA conversion if their AGI did not exceed $100,000. Beginning in 2010, the $100,000 income limit on Roth IRA conversions is repealed, and taxpayers will be able to make Roth IRA conversions without regard to their AGI. If you are eligible to convert to a Roth IRA in 2010, you will have the option of spreading the income ratably over two taxable years (2011 and 2012).

401(k) Contribution: The §401(k) elective deferral limit is $16,500 for 2009. If your §401(k) plan allows for catch-up contributions for 2009 and you will be 50 years old by December 31, 2009, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).

SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $11,500 for 2009. If your SIMPLE plan allows for catch-up contributions for 2009 and you will be 50 years old by December 31, 2009, you may contribute an additional $2,500.

Required Minimum Distributions: For 2009 only, taxpayers may waive taking their required minimum distribution. Thus, for 2009, no minimum distribution is required from IRAs or defined contribution plans (§401(k) plans, §403(a) and (b) annuity plans, and §457(b) plans that are maintained by a governmental employer). As a result, a person who attains age 70 1/2 in 2009 is not required to take a distribution by April 1, 2010.

Deferring Income to 2010

If you expect your AGI to be higher in 2009 than in 2010, or if you anticipate being in the same or a higher tax bracket in 2009, you may benefit by deferring income into 2010. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Some ways to defer income include:

Delay Billing: If you are self-employed, delay year-end billing to clients so that payments will not be received until 2010.

Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.

Accelerating Income into 2009

In limited circumstances, you may benefit by accelerating income into 2009. For example, you may anticipate being in a higher tax bracket in 2010, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note however that accelerating income into 2009 will be disadvantageous if you expect to be in the same or lower tax bracket for 2010.

If accelerating income will be beneficial, here are some ways to accomplish this:

• Accelerate Collection of Accounts Receivable: If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection before the end of 2009. Also see if some of your clients or customers might be willing to pay for January 2010 goods or services in advance. Any income received using these steps will shift income from 2010 to 2009.

• Year-End Bonuses: If your employer generally pays year-end bonuses after the end of the current year, ask to have your bonus paid to you before the beginning of 2010.

• Retirement Plan Distributions: If you are over age 59 1/2 and you participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2010.

Individual Deduction Planning

Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, remember to keep the following in mind:

Standard Deduction Planning: Deduction planning is also affected by the standard deduction. For 2009 returns, the standard deduction is $11,400 for married taxpayers filing jointly, $5,700 for single taxpayers, $8,350 for heads of households, and $5,700 for married taxpayers filing separately. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. You can do this by paying in 2009 deductible expenses, such as mortgage interest due in January 2010. For 2009, taxpayers who do not itemize their deductions can deduct up to $1,000 if filing jointly or up to $500 for single taxpayers for real property taxes. This benefit is in the form of an additional standard deduction. If by the end of 2009, you purchase an eligible motor vehicle and have an AGI below a threshold amount, the sales tax paid on the vehicle (up to a purchase price of $49,500) can be deducted as part of your standard deduction.

Medical Expenses: Medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 7.5% of AGI. Consider bunching medical expenses into years when your AGI is lower.

State Taxes: If you anticipate a state income tax liability for 2009 and plan to make an estimated payment, consider making the payment before the end of 2009 if you do not anticipate paying the alternative minimum tax. Note that in 2009 (but not in 2010), you can elect to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.

Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2009 even though you will not pay the bill until 2010. To avoid capital gains, you may want to consider giving appreciated property to charity.

The ability to distribute to charity up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 70 1/2 continues into 2009, but ends at the close of 2009. Ordinarily, such distributions would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on charitable contribution deductions.

Business Deduction Planning

Equipment Purchases: If you are in business and purchase equipment, you may make a “Section 179 Election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2009, you may elect to expense up to $250,000 of equipment costs (with a phase-out for purchases in excess of $800,000) if the asset was placed in service during 2009. In 2010, these dollar amounts are reduced to $125,000 and $500,000 (subject to inflation adjustments), so 2009 is the year to put property into your business to take advantage of the increased dollar amounts.

Bonus Depreciation: For 2009, taxpayers meeting certain criteria can claim a 50% bonus depreciation allowance. In order to claim the additional depreciation, the following criteria must be met: (1) the original use of the property must begin with the taxpayer after December 31, 2007, and before January 1, 2010; (2) the property must be acquired by the taxpayer in 2008 or 2009; (3) the property must be placed in service after 2008 and before 2010.

Education and Child Tax Benefits

Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return. In order to qualify for 2009, the taxpayer must be allowed a dependency deduction for the qualifying child. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers.

Credit for Adoption Expenses: For 2009, the adoption credit limitation is $12,150 of aggregate expenditures for each child, except that the credit for an adoption of a child with special needs is deemed to be $12,150 regardless of the amount of expenses. The credit ratably phases out for taxpayers whose income is between $182,180 and $222,180.

HOPE Credit and Lifetime Learning Credit: Significant changes are in place for the HOPE credit for 2009, including a name change to the American Opportunity Tax Credit. The maximum HOPE credit for 2009 is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years (rather than two as in past years) of the student's post-secondary education. For 2009, the credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers. Forty percent of the HOPE credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes. The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials” (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance).

The Lifetime Learning credit maximum in 2009 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the HOPE credit, eligible students include the taxpayer, the taxpayer's spouse, or a dependent. For 2009, the Lifetime Learning credit are phased out at modified AGI levels between $100,000 and $120,000 for joint filers, and between $50,000 and $60,000 for single taxpayers.

Kiddie Tax: For 2009, the kiddie tax applies to: (1) children under 18; (2) 18-year old children who have unearned income in excess of the threshold amount, do not file a joint return and who have earned income, if any, that does not exceed one-half of the amount of the child's support; and (3) children between the ages of 19 and 23 and if, in addition to the above rules, they are full-time students. For 2009, the kiddie tax threshold amount is $1,900.

Energy Incentives

Alternative Motor Vehicle Credit: For 2009, a credit is available for purchases of motor vehicles powered by certain alternative fuels. The dollar amount of the credit depends on fuel savings and weight of the vehicle. The most popular vehicles subject to the credit are hybrids. However, when a particular manufacturer sells in the United States its 60,000th of the particular hybrid, a phaseout period kicks in. The phaseout will reduce the credit from fully available to nothing being available. Due to this limitation, many popular hybrids have been phased out from the credit. Credits are also available for lean-burn technology vehicles (subject to the same phaseout), qualified fuel cell motor vehicles, qualified alternative fuel motor vehicles, and qualified plug-in electric-drive motor vehicles

Residential Energy Efficient Property Credit: Tax incentives are available to taxpayers who install certain energy efficient property, such as photovoltaic, solar water heating, fuel cell property, small wind energy property and geothermal heat pumps. In 2009, a credit is available for the expenditures incurred for such property up to a specific dollar limitation, except that the cap is removed for all property except fuel cell property, so 2009 may be a better time to purchase and install such equipment. The property purchased cannot be used to heat swimming pools or hot tubs. If you have made improvements to your home or plan to by the end of 2009, please contact me to discuss the amount of the credit you may qualify for.

Nonbusiness Energy Property Credit: After expiring in 2007, the nonbusiness energy property credit was re-enacted for 2009 and 2010 only. Property qualifying for the credit includes windows (including skylights), exterior doors, insulation, metal roof, advanced main air circulating fans, natural gas, propane, or oil furnace or hot water boilers, and other energy efficient building property that meets certain energy standards. The credit is 30% of the cost of the improvement(s) up to a maximum credit per year of $1,500.