Tax Law Update 2009

SAVE TAX DOLLARS

  1. Business Automobile Mileage ~ The standard mileage rate for business miles in 2009 increased to $0.55 cents per mile.  In 2010, it will be $0.50 cents per mile.
  2. Other Mileage Deductions ~ You may deduct $0.14 cents per mile for charitable activities.  You may deduct $0.24 cents per mile for medical and moving mileage ($0.16 1/2 cents per mile in 2010).  Parking fees and tolls are also deductible.
  3. Auto Depreciation Limits ~ Maximum depreciation limits are: For year 1 - $2,960, year 2 - $4,800, year 3 - $2,850, and $1,775 for each year after that.  There is also an $8,000 bonus depreciation available in the first year for vehicles used more than 50% for business.
  4. Business Equipment ~ Businesses can expense up to $250,000 for their equipment purchased in 2009 instead of depreciating the costs (reduced to $134,000 in 2010 and to $25,000 in 2011).
  5. Capital Gains ~ In 2009 & 2010 the maximum tax rate for gains from capital assets sales is 15% (0% in case of 15% tax bracket) for assets held more than 1 year (scheduled to return to 20%; 10% in 2011).
  6. Child Tax Credit ~ You may now receive a $1,000 tax credit for each qualifying child that is under 17, a dependent, a direct descendant, or foster child.  Phase out rules apply for higher incomes over $110,000 (MFJ) or $75,000 if single.
  7. College Education Credit and Deductions ~ You may be able to receive a credit for higher education costs (American Opportunity and Lifetime Learning Credits).  Even some interest paid on education loans may be deductible.  The American Opportunity Credit allows up to a $2,500 credit (100% of the first $2,000 and 25% of the next $2,000, up to 40% of this credit is refundable).  Phase out rules apply for incomes over $160,000-$180,000 (MFJ) and $80,000- $90,000 (Single filers).  The Lifetime Credit allows up to $2,000 (20% of the first $10,000).  It phases out between $100,000 - $120,000 (MFJ) and between $50,000 - $60,000 (Single filers).  There is a $4,000 above the line deduction for some students ($2,000 above the line deduction if AGI is $130,000-$160,000 (MFJ) and $65,000 - $80,000 (Single filers).
  8. Estate and Gift Taxes ~ In 2009, you may have an estate valued at $3.5 million and pay no estate taxes (to be repealed in 2010, returns to $1,060,000 in 2011).  In 2009 & 2010 you may give gifts up to $13,000 per year per person to reduce your estate.
  9. 401(k)s ~ The maximum contribution to a 401(k) retirement plan for 2009 and 2010 is $16,500 ($22,000 if 50 or older).
  10. Simple IRAs ~ The maximum contribution is $11,500 for 2009 & 2010 ($14,000 for those 50 or older).
  11. Traditional IRAs ~ For 2009 & 2010, you may contribute up to $5,000 ($6,000 for 50 or older) to a traditional IRA.  The deductible contributions are limited for individuals that are active participants in a retirement plan maintained by the employer.  Phase out at $89,000-$109,000 (MFJ), $55,000-$65,000 (Single filers), $0 - $10,000 (MFS).
  12. Roth IRAs ~ You may contribute up to $5,000 in 2009 & 2010 ($6,000 if you are 50 or older) to a non-deductible yet tax-free IRA.  Phase out rules apply for higher incomes over $166,000-$176,000 (MFJ), $105,000-$120,000 (Single filers), $0 - $10,000 (MFS).
  13. IRA Parity for Non-working spouses ~ Married couples with only one wage earner may now contribute up to $10,000 ($5,000 each) into 2 IRA accounts.  Some limitations.
  14. Personal Exemptions ~ Personal exemptions increased to $3,650 per dependent. The exemption phase-out begins at $250,200 (MFJ) or $166,800 (Single filers).
  15. Self-employed Health Insurance Deductions ~ As a self-employed individual, you may now deduct 100% of your 2009 health insurance premiums. 
  16. Social Security Taxes ~ Employees paid 6.2% on the first $106,800 of 2009 earned wages (to remain the same in 2010). Medicare (1.45%) has no ceiling.
  17. Standard Deductions ~ The standard deduction for married individuals has been increased to $11,400 ($5,700 for Single filers).  For dependents claimed on another’s return, it has increased to $950 or $300 plus any earned income up to $5,700.

YOU COULD SAVE TAX DOLLARS IF YOU:

  1. Document Charitable Donations ~ including mileage, cash and non-cash contributions.
  2. Maximize Retirement Plan Contributions ~ Set up an IRA or SEP account.
    • For IRA, contribute up to $4,000 ($8,000 with non-working spouse) before April 15th.

    • For Roth IRA, contribute up to $4,000 ($8,000) before April 15th.

    • If self-employed, establish an SEP and have the ability to make contributions as late as October 15th for a prior year tax deduction.

  3. Take advantage of any company matching 401(k) or other retirement benefit plans.

  4. Participate in Company Benefits

    • Take full advantage of company reimbursement and flexible spending plans.

    • Contributions to plan save both Federal income and social security taxes.

    • CAUTION:  It is a "use it or lose it" plan so calculate a conservative estimate to contribute.

  5. When purchasing a new home: 

    • When paying points, try to buy the home at the beginning of the tax year so you will have enough interest and taxes to itemize your deductions for that year.

    • Home improvements increase the cost or basis of your home so if you rent it later there is more depreciation allowed.

    • Therefore, save all receipts including those for landscaping.

  6. Timing. Time your real estate taxes, mortgage interest, donations, employee business expenses and other allowable deductions in one year or the next to maximize your itemized deductions.

  7. Investigate change in circumstances.  What has happened during the year that might affect your taxes? (i.e., Did a relative move in or move out of your home? Did you hire a nanny?)

  8. Save all receipts.  The Internal Revenue Service can deny deductions that are not documented for business or tax purpose.

  9. Record the business use of your vehicles.  Mileage logs or other form of substantiation are required. See automobile questionnaire.

  10. Make NO distributions from a qualified retirement plan before age 59 ½.  They are subject to a special 10% excise tax.

    • There are some exceptions to the rule.  If you are considering taking money out of a qualified plan, such plans would include 401(k) plans, pension and profit sharing plans and employee savings plans, your employer is required to withhold Federal income taxes of 20% which is withholding to be claimed when you file your tax return.  Even if you are planning on rolling the distribution into an IRA, the 20% withholding is required if a distribution is made directly to you. Withholding will NOT be taken on plan loans, distributions of employer securities, regular monthly payments (pensions), or transfers made directly to another plan (trustee to trustee transfer)
BUSINESS DEDUCTIONS
The general rule for allowing business deductions is any expense spent to earn your income. Therefore, record and itemize any costs that helped you sell, deliver, invoice, or collect $1.00 of revenue.
Common expenses are:

Business auto deductions.  Substantiation of business, personal, commuting and total miles each year is required.  You are allowed the greater of:

  1. Standard mileage, can deduct 37.5 cents per mile for business miles driven for 2004.  Choose standard mileage in the first year to have option of standard mileage or expenses in future years or
  2. Actual vehicle expenses, can deduct business portion of gasoline, insurance, tags, inspection, plates, repairs, maintenance, and depreciation

Other business auto deductions are:

  1. Parking and toll road fees
  2. Business portion of vehicle interest expense.

 Depreciation versus Section 179 deduction:

  1.    Section 179 expense-can elect an expense deduction up to $102,000 for 2004  for qualified property instead of depreciation.
  2.    Depreciation-an expense deduction is allowed ratable over the statutory life of asset.          
  3.    Do not recommend taking accelerated depreciation for business vehicles due to recapture rules.

Office in home (Need to qualify.)

Telephone expense

  1. Office in home-the first telephone line into your home is not tax deductible.  Other business lines are deductible.
  2. Long distance business calls are deductible.
  3. Cellular phone usage should allocate portion for personal use.

Payroll

  1. Employee versus contract laborer
    • Internal Revenue Service has increased auditing
    • 20 important questions.  See IRS Form SS-8.
  2. Employee reporting requirements on IRS forms 941, 940 & TEC form C-3, 1099s.  Most forms due quarterly, some annually.
  3. Payroll tax requirements.  Less than $50,000 monthly liability, taxes are due the 15th day of following month at local bank.
  4. S corporations need to have salary expense for officers. 

Overlooked Deductions

  1. Business gifts of $25 or less per recipient
  2. Cleaning and laundering services when traveling
  3. Depreciation of home computers
  4. Employee educational expenses
  5. Passport fee for a business trip
  6. Self-employment tax (1/2 of tax deductible)
  7. Trade or business tools with a life of 1 year or less
  8. Uniform and work clothes not suitable as ordinary apparel
  9. Expenses indirectly related to job such as refreshments for employees
  10. Health insurance premiums for the self-employed (100% for 2004)
  11. Retirement contributions that need to be made before filing return.

TO OWE OR NOT TO OWE THE IRS.

  • Did you owe the IRS money this year?
  • Did you get back less than you expected?
  • Would you like to get a refund or at least break even next year?
  • You may want to make a change in the amount of income tax withheld from your regular pay.  The amount depends on two things: the amount you earn, and the information you give your employer on Form W-4, Employee's Withholding Allowance Certificate.
The Form W-4 includes three types of information that your employer will use to figure your withholding:
  1. Whether to withhold at the higher single (S) rate or at the lower married (M) rate,
  2. How many withholding allowances you claim (each allowance reduces the amount withheld), and
  3. Whether you want an additional amount withheld. 

NOTE:  An important distinction needs to be made here.  Your withholding allowances may differ from the number of exemptions or

dependents that you may claim on your income tax return.  This confusion has caused a lot of taxpayers to find out that they are not

having enough Federal income taxes withheld from their paychecks.
If you want to make a change, you need to:
  1. Determine your present withholding status. (For example, Single rate with 1 allowance and no additional amount withheld)
  2. Decide if you want more or less Federal income taxes withheld.
  3. Give your employer a new Form W-4 to change your withholding status or allowances. 

HELPFUL HINT:  Most taxpayers with only earned wages that are reported on a W-2 and not able to itemize will owe little or no money

if they claim only one allowance.  To maximize your refund, claim no allowances and withhold at the higher single rate even if you are

married.

Katherine Nixon holds a BBA from Texas A&M University.  She is certified as a public accountant, a personal financial specialist, a professional coach and a long-term care specialist.   Her firm, SETFS, LLC is not a CPA firm.  Securities are offered through J.W. Cole Financial, Inc. (JWC), Member FINRA, SIPC.  Investment Advisory Services are offered through Jonathon Roberts Advisory Group (JRAG).  Tax preparation services are not offered through JWC/JRAG.  Insurance is offered as an independent agent.

As a Registered Representative, Katherine Nixon, may only conduct business with residents of the states for which properly registered. Therefore, a response to a request for information may be delayed. No information provided on this site is intended as a solicitation to buy or sell any security. The investments and services mentioned may not be available in every state. No security will be offered or sold to any person, in any state in which such offer, solicitation, purchase, or sale would be unlawful under securities laws of such jurisdictions.