Lehigh Valley Marketplace

By Eleanor Jacobs, CPA, Jacobs, Kenneson & Co.

Don’t wait until 2010 to think about maximizing tax benefits for 2009. If you have experienced any life-changing events this year, now is an excellent time to explore potential tax benefits available to you or to shift income and/or expenses with the goal of lowering your taxes. Examples of life-changing events include: a birth or death, marriage, divorce, loss of job, new job, purchase or sale of a personal residence or automobile, a child entering college or daycare, etc. Here are seven tips that might work for you:

Personal Tax Strategies:

If your itemized deductions are fairly close to the standard deduction ($11,400 for married individuals filing joint), it may make sense for you to accelerate or prepay 2010 expenses in 2009, and then revert to the standard deduction in 2010. Accelerating deductions will increase allowable deductions in 2009, and you can still benefit from the standard deduction in 2010. Strategies to make this work for you include:

• Paying your fourth-quarter state and local tax estimates in 2009 rather than waiting until the January 2010 due date.
• Make two years’ worth of charitable donations in 2009.
• Conversely, you might want to defer those contributions and taxes to 2010 because in 2009 you can itemize and add two items to the standard deduction. (This benefit will expire in 2009 unless extended by Congress.) The two deductions that increase the standard deduction are sales tax paid on the purchase of a new car, motor home, light truck and motorcycle purchased after February 16, 2009 and before January 1, 2010, real estate taxes up to $1,000
• Instead of writing a check for charitable contributions, consider donating appreciated stock that has been held for more than one year. Your deduction will be the stock’s fair market value on the date of contribution, which allows you to avoid capital gains and state tax while taking a tax deduction for the charitable contribution.
• Use capital losses to offset capital gains.

Contribute to an Employer Roth 401(k):

Current tax rates are the lowest they will be going forward. If your employer offers a Roth 401(k) plan, maximizing your contributions now can save in the long run. You can no longer assume that you’ll be in a lower tax bracket after you retire, so the pre-tax money you put away now will be worth more when you need it in retirement. Younger people aren’t aware that the highest marginal tax rates are at an all-time low (35% in 2009), while in 1963 that rate was 91% and 70% from 1965 through 1981.Given the national deficit, taxes will certainly increase in the future.

Fund a Roth IRA for Working Children or Grandchildren:

Instead of making monetary gifts to your working children or grandchildren, consider funding a Roth IRA in their name. The money will grow tax-free, and the contribution you can make for the beneficiary is the lesser of $5,000 or the amount of the child’s earned income.

Contribute to a Qualified Tuition Program for Relatives:

Pennsylvania residents may be able to deduct contributions to Qualified Tuition Programs (529 accounts) from their state taxable income. You can contribute up to $12,000 per beneficiary, per taxpayer, per year up to the amount of your taxable income. This is a great way to help fund college tuition for children and grandchildren. And, the funds can be transferred from the original beneficiary to another member of the beneficiary’s family (should the beneficiary opt not to attend post-secondary). These earnings are sheltered from federal and state tax as well, as long as they are used for qualified educational expenses.

Participate in an Employer Flexible Spending Account (FSA):

With out-of-pocket health care costs increasing every year, this is an excellent time to review your employer’s benefits package and consider participating in the FSA program. This program allows you to put away pre-tax dollars to be used to cover co-pays, prescription medicines, deductibles…any health-related, out-of-pocket expenses. You have the potential to save up to 40 percent in federal, state and local taxes on your contributions. Many people don’t participate because the accounts carry a “use it or lose it” stipulation. Because there is such a high tax savings, even losing some funds can save in the long run.

Waive Your IRA Required Minimum Distribution (RMD):

In 2009 there is an opportunity for most taxpayers otherwise required to take an RMD from their IRA to suspend the distribution without incurring a penalty. If you don’t need the cash, this is an excellent opportunity to shelter your 2009 distribution amount.

Convert Your 401(k) or Traditional IRA to a Roth IRA:

If you are retiring, you might want to consider rolling your distribution directly into a Roth IRA if you will not need these funds in retirement. There are income limitations that apply, and the increase in taxable income may have an adverse effect on the taxability of Social Security benefits and other limitations. This is a complex decision, and it is in your best interest to consult your financial advisor and your tax advisor to determine if you qualify and if this is a good strategy for you. In 2010, income limitations are removed and most taxpayers will qualify for Roth conversions. An additional option is provided for 2010 conversions only that allows taxpayers to elect splitting the tax on the conversion income evenly between 2011 and 2012. The tax will be based on the 2011 and 2012 tax rates.

Again, if you don’t need the funds in retirement, this is a good way to allow funds to grow and avoid paying possibly higher taxes on them when you begin taking distributions. Roth IRAs are a very attractive option for younger individuals who have more time for their investments to appreciate.

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties under the Internal Revenue Code nor may any such tax advice be used to promote, market or recommend to another party any transaction or matter addressed within this document. If you would like such advice, please contact us at (610) 530-1550.

Eleanor Jacobs, CPA, established her certified public accounting firm, Jacobs, Kenneson & Co. in Allentown in 2003. The firm serves professionals, entrepreneurs and small to mid-sized businesses, including a number of international clients. Prior to launching her accounting and tax practice, Jacobs held various positions at Internal Revenue Service, retiring as Chief, Quality Measurement Staff, Examination Division, Philadelphia, after a career of 27 years.