1. society
2. work
3. retirement

Contents
A Look Around
1
Quick Reference
2
You and Your Family
3
What’s New in 2009
Alternative Minimum Tax
Children and Dependents
Education Credits
Paying for Education
Medical Expenses
Charitable Gifts
Casualty Losses
Job Losses
11
Investments
Sam
Other Ideas
Mutual Funds
Passive Activities
Retirement
What’s New in 2009
IRAs
Roth IRAs
401(k) Plans
Distributions
Social Security
Real Estate
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What’s New in 2009
Home Loans
Moving Expenses
Rental Investments
Vacation Homes
Home Offices
Estate Planning
15
22
25
Planning Considerations
Gifts and Gift Tax
Beneficiary Designations
Trusts
Business
27
What’s New in 2009
Corporate Taxes
Credits
Business Deductions
Cars
Employer-Provided Benefits
Qualified Retirement Plans
Miscellaneous
2009 Income Tax Rates
Back Inside Cover
This guide aims to provide accurate and authoritative information. The guide is distributed with
the caveat that neither the publisher nor the distributor is herein rendering legal, accounting or
other professional services, and they assume no liability whatever in connection with its use.
Because the information in this guide may not apply to your personal situation, always discuss
tax, financial and legal questions with competent professional counsel.
Copyright © 2009
A Look Around
The beauty and magnificence of the country’s
landscape can be found in each of the fifty states.
Taking a step back to appreciate the natural wonders
surrounding us can be the antidote to the stress and
demands in our lives.
In the past year, the financial landscape has changed
dramatically for everyone. This guide is intended to
offer encouragement and show you where to look for
Sam
tax savings and opportunities. And, because it’s been
such an active year for Congress, additional changes
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may be enacted before year-end. Although the terrain
may be more difficult to negotiate, this year more than
ever, seek the guidance of your advisors. Together, we
can plan your journey, redraw your personal landmarks
and help you reach your financial destination.
Located in the Tularosa Basin of southern New Mexico is a
275 square mile area containing the world’s largest gypsum
dune field. Drive through or walk a trail to see these brilliant,
glistening white dunes – a true natural wonder.
You and Your Family
White Sands National Monument
New Mexico
Quick Reference
“Above-the-line” deductions even if you don’t itemize:
• Half of self-employment tax • Pay-ins by self-employeds
to Keogh, SEP and SIMPLE plans, medical savings accounts
(MSAs) and health savings accounts (HSAs) • Health insurance for self-employeds (and 2% owners of S-Corps) • Up to
$2,500 of student loan interest • Up to $4,000 for college expenses (based on AGI*) • Sales tax on the first $49,500 of the
purchase price of certain vehicles bought after Feb. 16, 2009
• Job-based moving costs • Performers’ expenses • Alimony •
Surrendered jury pay • Teachers’ supplies up to $250
Sam
Fully deductible (not subject to the 2% limit):
At A Glance—2009
• Amortizable bond premiums • Impairment-related job
expenses of the handicapped • Estate tax on income heirs
inherit, including estate taxes on IRAs, Keoghs, 401(k)s and
savings bonds • Gambling losses to the extent of winnings
Personal exemption
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$3,650
Phaseout of personal exemptions starts (AGI*)
• couple
• single
Standard mileage rate
• business use
• medical and moving
• charitable
55¢
24¢
14¢
Social Security earnings limit
• Age 66 and older
• Turn age 66 in 2009
• Age 62 to 66
Taxable wage base
• Social Security tax
• Medicare
no limit
$37,680
$14,160
$106,800
* Adjusted Gross Income
2009 contribution limits
• 401(k)s
additional catch-up amount
• IRAs
additional catch-up amount
• SIMPLES
additional catch-up amount
Automatic exemption from federal estate tax
* Adjusted Gross Income
Quick Reference
$250,200
$166,800
no limit
$16,500
$5,500
$5,000
$1,000
$11,500
$2,500
$3.5 million
You and Your Family
What’s New in 2009
• Lower payroll withholding tables issued in early 2009
will give individuals an advance on a refundable payroll
tax credit of up to 6.2% of earned income, capped at
$400 for singles and $800 for marrieds. Final amounts
will be calculated on year-end tax returns. Qualifying
retirees and pensioners got a $250 check instead; others
may be eligible for a $250 tax credit.
• The personal exemption is $3,650. A phaseout starts at
$250,200 for couples, $208,500 for heads of households,
and $166,800 for singles but even the highest earners get
a $2,433 exemption this year.
• The Standard Deduction has risen. Refer to the inside
back cover for details.
• The phaseout of itemized deductions starts at AGI
$166,800 (Married/filing separately - $83,400). Deductions above that threshold are cut by 1% of the excess,
no matter what your filing status, but you still cannot lose
more than 80% of your deductions. Exceptions: deductions for medical expenses, investment interest paid and
casualty losses are not reduced by the phaseout.
• Buyers of new qualifying vehicles bought in 2009 after
February 16 get an above-the-line deduction for the sales
taxes or other fees (in states with no sales tax) paid on the
purchase. Taxes on the first $49,500 of the purchase price
qualify. Phaseout starts at $125,000 AGI singles; $250,000
marrieds.
• There’s a new tax credit for the purchase of qualifying
plug-in electric vehicles; up to $2,500 plus $417 for each
kilowatt hour of battery capacity exceeding four hours.
• The first $2,400 of unemployment benefits is tax-free.
• The tax credit for energy efficient home improvements
rises for 2009 and 2010 to 30%. Maximum credit: $7,500.
• Extended through 2009: Tax-free IRA payouts to
charity; tax deductions for state and local sales taxes
and teachers’ supplies up to $250; the college tuition tax
break; and property taxes for non-itemizers.
Sam
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You and Your Family
Because changes are made to the tax laws each year, you
need to be aware of how those changes impact your
planning. Watch the many thresholds where tax liabilities
begin – reducing your adjusted gross income (AGI) or income to just below them may save on tax. And, because
AGI is a benchmark for many deductions such as IRA
contributions and itemized deductions, always consider
the effect of your moves on your AGI.
Strategies? Work out the effect of alternating between taking the Standard Deduction and itemizing in
two adjacent years; contribute stock to a favorite charity
to get a deduction for the fair market value – no tax is
due on the capital gain; contribute to retirement plans
which will also lower your AGI. Shift your income or
assets to other family members in lower tax brackets to
avoid income and estate taxes. Avoid Gift Tax by limiting gifts to $13,000 per person this year ($26,000 if your
spouse agrees.) Review your records for deductible items
you may have overlooked.
Sam
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Alternative Minimum Tax
AMT Risk Factors
If your tax is higher under the AMT rules than under
the regular tax, you must pay the AMT. The AMT has
only two rates and allows only a few deductions. 2009
AMT exemption amounts are $70,950 for joint returns
and surviving spouses; $46,700 for singles and heads of
households; $35,475 for marrieds filing separately.
•
•
•
•
•
•
large unreimbursed employee business expenses
exercising incentive stock option (ISOs) gains
living in states with high state and/or real estate taxes
large miscellaneous deductions
large number of personal exemptions (big families)
high medical expenses
You and Your Family
Children and Dependents
If you can claim a person as a dependent, no one else, not
even that person, can claim the exemption. But you get
no exemption for anyone with 2009 income (excluding
Social Security and tax-exempt income) over $3,650 except your spouse or a child under age 19 (24 if a student).
There is a uniform definition of “qualifying child”
for head-of-household status, the child care credit and the
earned income credit (EIC). Starting in 2009, several new
restrictions affect this definition including the provision
that the child must be younger than you in order to claim
a dependency exemption.
A dependent child with unearned income over $1
and total income of more than $950 or total income over
$5,700 (the Standard Deduction), must file a return.
If you have a “qualifying relative”, you may be able to
take a dependency exemption but you can’t claim head-ofhousehold status, the child tax credit, the EIC, or, unless
the person is disabled, the dependent care credit.
Sam
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Child-Related Credits
These credits are available only if you can claim the child
as a dependent. They reduce your regular tax dollar for
dollar.
• The $1,000 child tax credit for those under age 17.
Phaseout starts at AGI $75,000 singles; $110,000
couples; $55,000 married/filing separately.
• The adoption credit limit is $12,150. Adoption of
a special-needs child? Full credit even if your actual
expenses are less. Phaseout starts at AGI $182,180.
• The dependent care credit – up to 35% for
qualifying expenses up to $3,000 (one child) or
$6,000 (more than one) for costs of caring for a
child up to age 13. A Flexible Spending Account
(FSA), may save you more on taxes by paying
dependent care expenses from it rather than taking
the credit. Using a FSA will reduce the tax credit.
Children and Investments
The kiddie tax encompasses all children under age 19 (or
You and Your Family
full-time students under age 24) whose earned income
does not exceed one-half their support. The first $950
of a child’s investment income is tax-free, and the next
$950 is taxed at the child’s tax rate. If a child subject to
the kiddie tax has investment income greater than $1,900,
the excess is taxed at the parent’s highest rate and could
reduce the parent’s child-care credit, IRA deductions, and
medical and miscellaneous deductions, all tied to AGI.
Transferring investment assets to younger kids may
be a good idea if they are in a low bracket. In 2009, you
can transfer $13,000 (or $26,000 with your spouse) to
each child without Gift Tax. If you shift assets to your
kids, they’re treated as having held the assets since you
acquired them.
If you’re a business owner, pay a child/grandchild
reasonable summer job wages for a few years (but bona
fide services must be performed). If the child is under
age 18, no FICA taxes are due. You might want to put
the wages into a Roth IRA in the child’s name. Although
the contributions aren’t deductible by the child, if their
tax bracket is low the impact will be small.
Sam
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“Key” comes from the Spanish word “cayo” meaning “little
island.” The chain of islands that make up the Florida Keys is
connected by the Overseas Highway, one of the longest overwater roads in the world. It has more than 40 bridges includ-
Beach scene
The Florida Keys, Florida
ing one with a seven-mile span.
You and Your Family
Education Credits
• For 2009 and 2010, the “Hope Scholarship” credit has
been replaced by the American Opportunity Tax credit
– a credit of up to $2,500 a year for all four years of
college. Tuition and course materials are qualifying
expenses. The phaseout range has been raised so more
people can take advantage of the credit: starting at
$80,000 AGI for singles, $160,000 AGI for couples.
• The “Lifetime Learning” credit – 20% of up to
$10,000 of tuition costs for post-secondary education,
graduate school, and courses to gain or improve
job skills. Phaseout begins at AGI $50,000 singles,
$100,000 joint filers.
Sam
Marrieds must file jointly and must claim the student as
a dependent to take the credit. Students can claim these
credits if their parents don’t take personal exemptions
for them even if the parents paid the college tuition.
However, students must have some income tax liability
to offset.
The student must be at least a half-time student for
at least one academic period in the year. You can take
either credit in a year you take tax-free distributions from
a Coverdell Education Savings Account but not for the
same expenses.
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Other Education-Related Tax Benefits
• The above-the-line deduction for higher education
tuition was extended though 2009. The maximum
deduction is $4,000 for those with AGI not exceeding
$65,000 singles, $130,000 marrieds; $2,000 for
those whose AGIs exceed those limits but not
more than $80,000 and $160,000 respectively.
• Student loan interest is an above-the-line deduction
allowed to the person obligated to make the loan
payment. Maximum credit: $2,500. Phaseout starts
at AGI $60,000 singles, $120,000 marrieds.
Paying for Education
Coverdell Education Savings Accounts
These accounts allow for deposits of up to $2,500 per
You and Your Family
child (under age 18) of nondeductible funds. The funds
can grow and be used tax-free to pay tuition and other
costs up to the time the child reaches age 30. Amounts
are usable for K-12 at parochial and private schools. Parents and others can establish the account; contributions
are not included in the combined annual limit on your
“other” IRAs. AGI phaseout starts at $95,000 singles,
$190,000 marrieds. You can take a Coverdell distribution
in the same year you claim education credits, but not to
cover the same expenses.
Qualified Tuition Plans
Earnings on funds contributed to prepaid tuition plans
are excluded from tax if distributions go for qualified
education expenses; otherwise, a 10% penalty applies.
Contributions to 529s are excluded from the donor’s
estate, so they are a good way to reduce an estate and the
taxes on it. You can deduct from your estate in the first
year the first five years’ worth of gifts to a child’s 529
plan. Thus, $65,000 can exit the estate (or up to $130,000
for a couple) in the first year for each child. Your advisor
can help you find the best plan for you.
Sam
ple
Other Ideas
• Buy U.S. “education bonds”. Phaseout of the full
interest exclusion starts at AGI $69,950 singles,
$104,900 marrieds. The limits apply when the bonds
are cashed not bought. The bonds must be in a
parent’s name, so a grandparent wanting to help might
consider giving the money to a parent rather than
buying bonds directly.
• You can make penalty-free (but not tax-free)
withdrawals from IRAs to pay higher education
expenses.
• Tuition for kids with learning problems may be
deductible.
• Open an account for your child under the Uniform
Gifts to Minors Act.
• A 2503(c) trust – the trustee can use funds in the trust
to pay the child’s college expenses. Note: the trust
figures into collegiate financial aid formulas as an asset
of the child.
You and Your Family
Medical Expenses
What’s New in 2009
• More long-term-care premiums are deductible for all
age groups; taxpayers age 71 and older can claim up to
$3,980 per person.
• Deductible pay-ins to Health Savings Accounts rise to
$5,950 family, $3,000 self. Those born before 1955 can
put in an extra $1,000.
• Workers laid off after Aug. 31, 2008 and before Jan. 1,
2010 can get 65% of their COBRA premiums paid by
the federal government for up to nine months. This is
a refundable credit but the subsidy is taxed for AGIs
over $125,000 singles; $250,000 marrieds.
Sam
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The medical mileage rate for 2009 is 24¢. In general,
medical expenses are deductible to the extent they exceed
7.5% of AGI. Some possible deductible expenses include: medical insurance premiums, home capital improvements needed for medical reasons and prescription
drugs.
Sequoia National Park is the country’s second oldest national
park. The western slope of the Sierra Nevada range is the
only place today where the trees grow naturally. The giant se-
quoias can reach 325 ft. and some of these trees are estimated
to be 1,500 – 2,700 years old.
Giant Sequoia Grove
Sequoia National Park, California
You and Your Family
If your employer offers a “flexible spending account” (FSA), a cafeteria plan for medical expenses
not covered by insurance, or a Health Reimbursement
Arrangement (HRA), participation in them will save you
money. A Health Savings Account (HSA) helps those
who have health insurance policies with high deductibles:
$2,300 for family coverage or $1,150 for self.
Charitable Gifts
IRA holders over age 70½ can still directly transfer taxfree up to $100,000 to an eligible charity.
All cash donations, regardless of amount, require
documentation (canceled check, bank record, receipt
from the charity) in order to claim a deduction. It may be
a good idea to make all donations via checks.
Depending on the condition and claimed value of
a donated item, you may need an appraisal – e.g. an item
not in good condition valued at over $500; an item in
good or better condition valued at over $5,000. The rules
on donations of cars, boats and planes are also strict.
Sam
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Casualty Losses
There are new rules for 2009 for federally-declared disaster areas. Personal casualty losses must be reduced by
$500 for each loss. The 10%-of-AGI limitation has been
removed and you no longer need to itemize to claim the
loss. Non-disaster areas: losses are subject to the 10%-ofAGI limitation and the $500 floor. (The 2008 Midwest
disaster area is subject to different rules.)
Job Losses
Severance pay is fully taxable but an ex-employer’s continued payment of health and accident benefits is not.
Outplacement services are tax-free if not paid in cash.
The first $2,400 of unemployment benefits is now taxfree.
10
You and Your Family
Investments
So far, the tax on long-term capital gains, and on qualified dividends received, for those in the 10% and 15% tax
brackets, will remain 0% through 2010.
The Kiddie Tax - the unearned income over $1,900
of kids under age 19 (24 for a full-time student whose
earned income is less than half his/her support) is taxed
at the parent’s marginal rate. Grandparents who wish to
help grandchildren pay for college, take note, especially if
the grandchildren are age 19 and over and escape the kiddie tax. Tax savings could be significant if the child sells
stock at a zero tax rate.
To limit the tax on your capital gains, plan and correctly “net” your long- and short-term gains and losses.
If you have a net long-term capital loss, you can apply it
(and losses carried forward from earlier years) against any
net short-term capital gain. Try to plan your sales to take
full advantage of these offsets, without letting tax considerations dominate your investment moves.
If your investment losses, including those carried
forward (they can be carried forward indefinitely), exceed
your gains, you can use up to $3,000 of a net capital loss
to offset ordinary income in a given year. Check through
your records for unused capital losses from earlier years,
because they are easy to overlook.
Sam
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Rules of Thumb
• If you have realized capital losses larger than realized
capital gains by more than $3,000, sell more capital
gain property.
• If realized gains exceed losses, sell more loss property
to eliminate tax on the gains.
• If your deductions for this year exceed your income,
don’t realize any more losses — they’ll be unusable
this year (and if they’re non-capital they may not be
eligible for carryover to later years).
Investments
11
Investment interest is deductible up to the total of
investment income, and you can carry forward the excess
interest to later years. (Or you can realize more capital
gains to offset the excess this year.)
Other Ideas
• Many expenses connected with investments qualify
as miscellaneous itemized deductions (subject to
the 2% floor): office rent; legal fees; accounting and
secretarial fees; certain travel expenses; investmentrelated newsletters, books, etc.; long-distance phone
calls; postage; travel to your broker’s office; custodial
IRA fees paid out of separate funds; fees to financial
planners or managers; and rental fees for safe-deposit
boxes. Brokers’ and mutual fund commissions aren’t
deductible but should be added to the basis to reduce
capital gain upon sale.
• The “wash sale” rule disallows losses on stocks and
bonds if you rebuy substantially identical securities (or
funds) within 30 days of the sale.
• Bond interest is taxable at regular rates that can reach
35% and, when interest rates rise, bond and bond
mutual fund values fall. Municipal bonds may be good
investments for high-incomers, especially in high-tax
states.
• Use the correct “basis” for stocks or assets you
inherit—their value on the date of the previous
owner’s death.
• Owners of worthless securities (but not of worthless
partnerships) have seven years to file retrospective
claims for tax refunds.
• Keep your “buy and hold” stocks in your taxable
account, and stocks you may hold for shorter periods
in your tax-deferred account.
• There are tax incentives to invest in low-income areas.
The cap on allowable credits for ordinary low-income
housing deals is high, and states can issue privateactivity tax-exempt bonds
Sam
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Mutual Funds
Capital-gain distributions from mutual funds increase
12
Investments
your net capital gain for the year. Long term gains qualify
for favorable tax rates; short-term gains do not. If you
see such gains coming, try to offset them by selling securities with values currently below your basis in them.
Long-term investors in mutual funds who reinvest
dividends and capital gains often fail to include these in
the cost basis of shares, and thus overpay taxes when
they sell them. However, this requires careful recordkeeping. An alternative is to take the dividends in cash,
and thus keep your original cost basis, while reducing
paperwork.
There are several ways to figure the cost basis of
shares. The average-cost method is most popular and
most fund groups use it to provide cost figures to clients.
Although the most flexible method to minimize taxes
is to designate specific shares, it requires careful recordkeeping. And once you select a method, you must stick
with it.
If you sell a mutual fund this year, remember to
add to your original cost basis all dividends, capital gains
distributions and sales charges. This could greatly reduce
your reported gain or increase your reported loss.
Sam
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• A mutual fund is “tax efficient” if its returns show
up as appreciation in the share price, not as taxable
distributions. A fund with large unrealized losses may
be a buy, because, when realized, the losses will offset
gains. A fund can lose value and still pay out gains
taxable to you.
• When you’re tax-loss selling mutual funds to offset
gains, the loss should generally exceed $1,000 or 10%
of the invested amount; otherwise, the benefit may be
negligible.
• If you want to keep your taxable state income down,
buy short-term Treasuries rather than money-market
funds.
• If you buy a mutual fund that is about to pay a
dividend, including capital gains dividends, you’ll pay
tax on the payout without enjoying any increase in
your wealth (share prices drop by amounts paid out).
Wait to buy until after the record date for payment.
If a fund’s value has fallen, selling before the payout
Investments
13
record date will provide a loss that can offset gains
elsewhere, and you avoid taxes on the payouts.
Passive Activities
Certain investments are defined as “passive” to prevent
their use as tax shelters for other types of income. There
are two types of passive activities: 1) the owner (often
limited partnerships or S Corporations) does not “materially participate” and 2) any rental activity (irrespective of
the level of participation) for which payment is mainly
for the use of tangible property. (There are a few exceptions.) Passive activity investments do not include stocks
and bonds. The Real Estate chapter describes a large
exception to the passive-loss restrictions for those who
actively participate in renting real estate.
Sam
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The Coyote Buttes harbor one of the country s most spectacular
geological formations
The Wave
Here you will
swirling strata throughout sandstone formations
to see it for yourself
you better plan ahead
nd colorful
But if you want
The Bureau of Land
Management considers the area to be especially fragile and
visitors per day
The Wave Coyo
t e Buttes
Near the Utah Arizona border
allows only
14
Investments
Permits are required
Retirement
What’s New in 2009
The required minimum distributions (RMDs) from
401(k) plans, IRAs and similar retirement accounts were
suspended for 2009. Nor need heirs take withdrawals
from inherited plans and IRAs.
Whether, when and how much retirement savings devastated in the recent collapse will come back remains to be
seen. But don’t discontinue saving for retirement. Refer
to the chart on the page 16 for the limits on contributions to retirement plans.
The “savers credit” for contributions to retirement
plans now includes more people: AGI up to $55,500
joint; up to $27,750 singles, with a maximum credit of
$1,000 for singles, $2,000 for joint filers.
Sam
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All IRAs offer great flexibility in investment vehicles.
By reducing AGI, contributions to traditional IRAs and
401(k)s can increase other tax benefits, such as medical, casualty, miscellaneous and other deductions, the
dependent-care credit, or exemptions, and can reduce or
eliminate penalties for underwithholding. And retirement
accounts don’t figure in tuition-assistance formulas colleges use to compute eligibility for aid.
Traditional IRAs and 401(k) plans are good for those
who will retire fairly soon, expect their tax rate to fall in
retirement, or cannot make current contributions without an up-front tax break. Roth plans, both of IRA and
newer 401(k) types, provide potentially bigger long term
tax breaks. Unlike owners of traditional IRAs or Roth
401(k)s (except in 2009), owners of Roth IRAs need not
take minimum distributions after reaching age 70½. They
can make contributions after that age, and may be able
to pass on large sums to heirs. All Roths can be good
hedges against future tax increases or a higher tax bracket
when you retire.
Retirement
15
Contribution Limits
Plan
2009
IRA
individual
$5,000
Indexed to
inflation
age 50+ add’l
$1,000
Indexed to
inflation
individual
$5,000
Indexed to
inflation
age 50+ add’l
$1,000
$1,000
individual
$11,500
Indexed to
inflation in $500
increments
Roth IRA
SIMPLE
IRA
Sam
age 50+ add’l
Roth
401(k)
$2,500
Employer can
defer lesser of
$49,000 or 25%
of compensation
SEP
401(k)
2010
ple
individual
$16,500
age 50+ add’l
$5,500
individual
$16,500
age 50+ add’l
$5,500
Indexed to
inflation in $500
increments
Indexed to
inflation in $500
increments
If a plan features an employer match, take advantage of
it. Don’t contribute to a Roth or traditional IRA at the
expense of an employer match. SEPs and SIMPLEs have
been displacing earlier Keoghs, with their complex record
keeping. Tax-deferred annuities are another possibility.
Individual Retirement Accounts (IRAs)
If neither you nor your spouse is covered by a qualified
employer-sponsored plan, you can contribute to an IRA
and jointly exclude from current tax up to $10,000 of
current income, even if one spouse does not work. (But
spouses cannot contribute more than their combined
earned incomes.) If either spouse participates in a qualified employer-sponsored plan, contribution deductibility
16
Retirement
Plusses
Minuses
Use
Tax-deferred
savings
Withdrawals not
tax-free; participation
in employer plan
affects contribution
deductibility
Earnings and
withdrawals tax-free;
flexible distribution
No up-front
deduction; pay-in eligibility
phases out at
Individuals $105,000-$120,000
Couples $166,000-$176,000
For
individuals
For
individuals
High contribution
limit; employer
must match
Withdrawals not
tax-free
For small
businessesless than 100
employees
High contribution
limits
Withdrawals not
tax-free
For selfemployeds
and their
employees
Tax-deferred contributions and growth;
employer match not
taxed to owner
Employee
withdrawals
only allowed under
limited conditions
Earnings and
withdrawals tax-free;
employer can match
No up-front tax
deferral
Sam
ple
Employer
sponsored
Employer
sponsored
is subject to AGI limits.
If ineligible for a deductible IRA contribution (or
over the AGI limit for a Roth IRA), you can make nondeductible IRA contributions up to your earned income
or $5,000, whichever is less. Non-deductible IRAs are a
good place for after-tax dollars if you trade in and out of
stocks and mutual funds: you can buy and sell without
paying taxes. The paperwork needed to distinguish deductible from non-deductible contributions is immense,
so establish a separate IRA for each.
Avoid dipping into tax-favored accounts; use taxable
savings first. And consider tax-free loans from a retirement plan before a taxable withdrawal from an IRA. Penalty-free early withdrawals from IRAs (before age 59½)
are allowed for: medical expenses and health insurance
Retirement
17
premiums in excess of 7.5% of AGI; the first-time purchase of a house (liberally interpreted); or to pay qualified
higher education expenses for the immediate family. But
tax will be owed.
Roth IRAs
The greatest benefits of Roth IRAs may be in transferring wealth to heirs. A Roth IRA is not subject to minimum withdrawals (or cessation of contributions) at age
70½ and may provide far more to a beneficiary than
other plans. Assets in the account for five years can pass
to heirs without current income tax. Non-spousal heirs
who inherit a Roth IRA may have to take minimum distributions but can stretch them out over a lifetime, during
which the IRA is enjoying tax-free growth.
Although contributions to a Roth IRA are nondeductible you can withdraw them (only) without tax or
penalty. So keep track of your Roth pay-ins. Amounts
you convert to a Roth IRA may count as pay-ins, too
(and if you’re under age 59½ you may have to pay a
penalty). After five years you can withdraw earnings early
(before age 59½), with tax but without penalty, for your
first purchase of a house ($10,000 limit), for education,
or because of disability. After five years and age 59½,
you can withdraw all of the Roth for any reason. The five
year period starts with the tax year of the first conversion
or contribution.
Sam
ple
401(k) Plans
401(k) plans are excellent tax-saving vehicles, especially if
your employer matches your contributions, because the
matches are not income to you. But no unrealized losses,
even on after-tax contributions, are deductible. Know
the rules of your 401(k). If a departing employee has a
balance below $5,000 in a company 401(k) or pension
plan, the company can evict (“cash out”) the employee
from the plan. Cashing out a 401(k) can prove costly.
When leaving an employer it’s usually best to wait and roll
it over into a new employer’s plan or just roll it into your
own IRA. Borrow from your 401(k) rather than cashing
18
Retirement
out. If an employee cashes out of a 401(k) and doesn’t
roll over within 60 days, the employer must withhold
20% of the account balance, federal, state and local taxes
are due on the entire amount withdrawn, and possibly a
10% early-withdrawal penalty.
The Roth 401(k) combines the features of traditional
401(k)s and Roth IRAs. There’s no up-front deduction for the contributions (the limits are the same as for
regular 401(k)s and include catch-ups) but withdrawals
are tax-free after age 59½. There are no income limits for
eligibility for Roth 401(k)s. The contribution limits apply
to all your 401(k)s, so you can’t put $16,500 (or $22,000)
into both a regular and a Roth 401(k), but you can divide
your contribution between the two types in any year.
The contributions for ordinary and Roth 401(k)s are
after-tax, while earnings and withdrawals will be tax free.
If the earnings are large or tax rates at the withdrawal date
are high, the tax benefit will be invaluable.
Sam
ple
Distributions
Minimum distributions from IRAs are not required in
2009, but delaying withdrawals until 2010 could mean
a higher tax in the event tax rates go up. Yet you won’t
have to add skipped payments to what you withdraw in
2010, which will be based on your age and your Dec. 31,
2009 balance. If you hit age 70½ in 2009, you must take
your 2010 withdrawal by the end of that year. Inherited
IRAs are eligible for the same break, and if they had to
be fully distributed by the end of 2009 the heirs get an
extra year to withdraw all the funds. The waiver applies
also to 401(k)s and 403(b)s.
You can still do a direct payment from your IRA to
a charity in 2009 without paying tax or having extra income. You and your spouse can each give up to $100,000
from your separate accounts, but you get no deduction
for the donation. And you’ll need a receipt in hand before
you file your return.
You can withdraw funds from an IRA for 60 days
without penalty, but if you exceed that limit you pay tax
and penalty on the funds as of the day of withdrawal.
Retirement
19
You can make only one such withdrawal per plan per
year.
A 10% penalty plus regular income tax applies to
premature withdrawals (before age 59 ½) from IRAs
unless you are disabled, but you can avoid the penalty by
withdrawing the funds in equal periodic payments (an
annuity). The penalty also is waived if you use the early
withdrawal to pay medical expenses in excess of 7.5%
of AGI, to buy health insurance (conditions apply), or to
pay certain education-related expenses or (up to $10,000)
to buy a first house.
The usual “distribution” or withdrawal choices from a
company plan are a lump sum or an annuity. An amount
corresponding to nondeductible contributions over the
years is tax-free, with the remainder taxed at the regular
or averaging rate. Some part of any withdrawal will be
taxable, even if you isolate deductible and nondeductible
contributions in separate plans.
Until recently only surviving spouses could roll over
a decedent’s interest in a qualified plan. Now non-spouse
beneficiaries can do it (plan permitting), via a trustee-totrustee transfer and under certain minimum distribution
rules. All plans must permit rollovers out of the plan for
non-spouse beneficiaries after 2009. There is still no nonspouse rollover available from IRAs.
Sam
ple
Almost half of those who leave their jobs take a cash distribution from their 401(k)s rather than rolling the funds
over. This can be a serious mistake. A direct rollover to
a personal IRA is often best because of the more liberal
distribution rules for an IRA, and there is no withholding
on the distribution.
If you roll over a lump-sum distribution to an IRA
within 60 days, tax is deferred, but you cannot roll over
only the nondeductible portions. There may be an exception to the 60-day rule in cases of hardship. Payments
from company plans can begin after you reach age 55 and
leave the company.
If you take a lump-sum distribution from your
401(k), have the company give you any company shares
in it and put them in a taxable account. You’ll then pay
20
Retirement
ordinary income tax on the tax basis of the stock when it
was put into the 401(k). No tax will be due on the builtup appreciation; you’ll pay that tax, at favorable long-term
gain rates, when you sell the stock. If you hold the stock,
your heirs will receive a step-up in basis when you die.
Retirement Age Schedule
Social Security
YEAR OF BIRTH
1937 or earlier
1938
1939
1940
1941
1942
1943-1954
1955
1956
1957
1958
1959
1960 and later
FULL RETIREMENT AGE
Sam
65
65 and 2 months
65 and 4 months
65 and 6 months
65 and 8 months
65 and 10 months
66
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
67
ple
The earnings test for Social Security benefits this year for
those under full retirement age: $1 in benefits is withheld
for every $2 that income exceeds $14,160. The test applies to each person, not to couples. In the year you reach
your full retirement age, the charge is $1 for every $3 that
your income exceeds $37,680 (until the month you reach
full retirement age). Beneficiaries who work get no relief
from FICA tax, even if they work only part time and the
pay is not enough to raise their benefits.
There may be tax on your Social Security benefits if
your “provisional income” exceeds set limits. The rules
are complex so seek advice. And tax-exempt income figures in the calculation of the taxability of Social Security
benefits.
Retirement
21
Real Estate
What’s New in 2009
• The tax credit for first-time (haven’t owned a main
residence for the last three years) primary homebuyers
buying between Jan. 1 and December 1, 2009 rises
to 10% of the purchase price or $8,000, whichever is
less. It need not be repaid if the home remains a main
residence for 3 years after the purchase date. 2008
purchases remain subject to the earlier rules, including
pay-back. Phaseout of the credit starts at $75,000 of
modified AGI for singles, $150,000 for joint filers.
• The exclusion for forgiven home mortgage debt
extends through the end of 2012. The cap remains $2
million of debt forgiveness.
Sam
ple
Gain of up to $500,000 on the sale of a principal residence by a couple (of any age) remains exempt from tax.
For individuals, $250,000. A taxpayer who owned and
used the property as a principal residence for a cumulative two years during the five years preceding the sale can
claim this exclusion once in any two-year period, for any
number of periods. To qualify for a full exclusion, either
spouse can meet the ownership requirement but both
must meet the use requirement. Surviving spouses have
two years following a spouse’s death to sell a primary
home and claim the $500,000 exclusion. But vacation or
second homes converted to a main residence after 2008
and later sold might not qualify for the full exclusion.
Sales due to job changes, bad health or unforeseen
circumstances get partial relief even if the two-year use
and residency tests aren’t met.
Property taxes can still be deducted through 2009 by
non-itemizers as an addition to the standard deduction,
capped at $500 singles; $1,000 marrieds.
Home Loans
Mortgage points paid on the purchase of a main
22
Real Estate
residence are fully deductible so long as the cash down
payment at least equals the cost of the points. Not all
points are deductible up front. In a refinancing, they can
be deducted evenly over the term of the loan.
If the mortgage balance increases when you’re
refinancing, interest on the excess portion is added back
to income under the AMT. (Exception: when the extra
proceeds are used for home improvement.) So if you use
the funds to buy a new car, interest on that part is not
deductible for the AMT.
A full deduction for interest on up to $1 million of
properly recorded Home Acquisition Debt (to buy, build,
or substantially improve a main or second residence)
remains a major tax shelter. (If the mortgage dates from
before Oct. 13, 1987, all the interest is deductible.) Interest on a Home Equity Loan up to $100,000 is fully deductible; deductibility on amounts above that depends on
its use. High home-equity debt might trigger the AMT.
Sam
ple
Moving Expenses
Deductible moving costs include those for a professional
mover, rented moving van, moving a mobile home, and
travel and lodging en route, and these only if the new job
is 50 miles farther than the old job from the old house.
(If the mover had no full-time pre-move job, the new job
must be at least 50 miles from the old house.) There are
requirements for periods of work after the move. The
cost of moving household goods is an “above-the-line”
deduction. The standard mileage rate for moving is 24¢.
Rental Investments
A rental activity in which the payment is for use of
tangible property is “passive.” Losses from this type of
activity can offset only gains from such activities. Losses
unusable this year can be carried forward to years when
you have passive-activity income. The only other way to
use suspended losses is to dispose of the entire activity.
The depreciation period for nonresidential real property
is 39 years for most property placed in service after May
12, 1993. That for residential rental property is 27½
years. There is an exception if you “actively” participate
in renting real estate and meet the requirements.
Real Estate
23
Repairs to a rental property can be deducted for the
year when made, but improvements must be depreciated
over many years. To keep them separate, do the work
at different times and get them billed separately. If you
convert to rental use a house that has lost value since you
bought it, only the drop in value after the conversion will
be deductible when you sell.
Vacation Homes
There’s a new restriction on converting a vacation home
to a primary residence. A portion of the profit will be
subject to tax, based on the time after 2008 when the
house was a second home or a rental to the total time you
owned it.
There are different rules for the treatment of rental
income and deductions depending on the number of
rental days and personal use of the property per year.
Sam
ple
Home Offices
If you have no other fixed location where you perform
administrative or managerial activities, expenses of a
home office may be deductible but you cannot deduct
more than the net income from the business. The home
office must be used regularly and exclusively for business. If you are an employee, it must be necessary for the
employer’s business.
In a sale of your home, gain on the office part may
be taxable and depreciation may have to be recaptured.
Niagra Falls
New York
During peak
tourist hours,
more than 6
million cubic
feet of water
falls per minute
over Niagara. In
the last 12,500
years, the Falls
have retreated
7 miles; the
projected future
erosion rate is
1 foot/year.
24
Real Estate
Estate Planning
Estate tax has become less threatening as the economy
has reduced most estates and the exemption has risen
to $3.5 million for 2009. A big issue under these shifts
is whether current wills still reflect the owner’s intent.;
e.g. if the will says a beneficiary is to receive the exemption amount and the spouse the remainder, the spouse
now may not get enough assets to live on. Those who
might accumulate $3.5 million should transfer assets early
through planned gifts etc. so no more than the exemption
amount is left in the estate.
Sam
Planning Considerations
It’s easy to misjudge your estate’s size and many of your
assets should pass outside your will, through IRAs, qualified plans and insurance proceeds. A precise designation
of beneficiaries may be your most crucial planning issue.
If you are in line to inherit from an estate, consider these
money-saving ideas:
• If the inheritance will put your own estate over the
exemption amount, you can renounce your share
through a disclaimer and pass it on directly to later
generations. Your estate will pay no tax.
• An estate’s assets are valued as of the date of death or
6 months later – choose the date resulting in the least
estate tax.
• The basis of property you inherit is stepped up to its
market value at the date of death. If you later sell the
property at a loss, you can deduct the loss.
ple
Under the “marital deduction,” one spouse can pass an
unlimited amount to the other without tax. Yet such
transfers only delay taxes; the assets are taxed when the
surviving spouse passes them on to children. If one
spouse passes everything to the other, they get only one
exemption. To secure two exemptions, set up two asset
pools: pass one, valued at the exemption amount, to children or others; pass the remaining assets to the surviving
spouse under the marital deduction. Then the spouse can
later pass on another exemption amount. The best way to
Estate Planning
25
use the marital deduction often is to equalize the value of
the two estates, to keep the overall rate as low as possible.
The “Generation-Skipping Tax” (GST) for 2009 is
45% on transfers to generations twice or more removed
from you. Each transferor gets a $3.5 million lifetime
exemption.
Gifts and Gift Tax
The lifetime exemption amount for the Gift Tax stays at
$1 million and the Gift Tax exclusion rises to $13,000.
The aging of baby boomers and their parents makes giftgiving important for tax saving.
Recipients of gifts who are in lower brackets will
pay lower income tax on the earnings of some assets
and gain in donated property stays out of your estate. If
the assets are still in your estate when you die, their tax
basis is stepped up but they could be subject to estate tax
far higher than the capital gains rate. There can be good
reasons to make gifts even above the tax-free limits; e.g.
if they would reduce your heirs’ estate tax. If you exceed
the $13,000-$26,000 limit, you must report the excess to
the IRS.
Sam
ple
Beneficiary Designations
Your provisions in a will do not necessarily supersede the
beneficiary designations you make in trust agreements,
insurance policies, bonds, bank accounts and retirement
and profit-sharing plans, which can represent most of an
estate. These may trump a will, so keep them up to date.
Better, make sure your will and such designations agree.
These are crucial issues.
Trusts
Another estate planning tool: Trusts. There are many
variations and features; e.g., they can be set up before or
after you die. If you set up an irrevocable trust now, the
assets you donate to it are out of your estate (but there
could be Gift Tax implications). Assets you put into a
trust after you die are subject to probate.
26
Estate Planning
Business
What’s New in 2009
• The standard mileage rate for business driving in 2009
is 55¢ per mile.
• 50% bonus depreciation and the $250,000 Section
179 expensing limit (available until $800,000 in new
assets are placed in service) were renewed for assets
bought in 2009. Fifty percent of the cost of new or
used assets placed in service can be expensed, the
other 50% depreciated under the normal rules. The
bonus depreciation is in addition to the year’s regular
depreciation for the property.
• Individuals who operate small businesses, have 2008
AGI less than $500,000, and get more than half their
AGI from a firm with fewer than 500 workers can
base their 2009 estimated payments on the lesser of
90% of either 2008 or 2009 tax liability.
• The federal Government will subsidize COBRA
payments for laid-off workers. Businesses pay the
subsidized portion up-front and get a tax credit on
their payroll tax returns, or reduce payroll tax deposits
by the relevant amounts. They must try to locate exemployees eligible for the retroactive 60-day election
period and tell them about it.
• Prompted by the economic crisis Congress delayed
funding requirements for many qualified plans. See
your tax advisor for details.
• Extended through 2009: the 20% R&D credit
(enhanced); 15-year depreciation for leasehold
improvements and restaurant renovations (applicable
to new restaurants and retail stores starting in 2009);
the new markets tax credit; and a 0.2% FUTA surtax.
Also extended or enhanced: the work opportunity
tax credit; the increased rehab credit for structures in
the Gulf Opportunity Zone; and the deduction for
energy-efficient commercial buildings.
• Businesses affected by natural disasters may qualify
for increased expensing for disaster costs, special
Sam
ple
Business
27
depreciation for disaster property, enhanced NOL
carrybacks and other tax breaks.
35%
$10 million +
$335,001-10 million
Sam
34%
$100,001-335,000
34%
$75,001-100,000
15%
25%
$50,001-75,000
39%
$0-50,000
Corporate Regular Tax Rates
Corporate Taxes
The first $50,000 of taxable income is taxed
at 15%, the next $25,000 at 25%, etc. An
extra 3% surtax applies to income between
$15 million and $181/3 million. A Personal
Service Corp. pays 35% tax on all income.
ple
Because corporate tax rates do not compare favorably in
many cases to individual rates, operating as a partnership,
S Corporation or sole proprietorship can make sense.
Partners and S-Corp shareholders pay tax at ordinary
rates on their income from the business. But regular corporations pay only 15% on income less than $50,000 and
shareholders in the lower brackets pay 0% on dividends
they receive, so take these into consideration when deciding how to structure your business.
Credits
• The re-instated R&D credit can apply to certain
research aimed at making or improving a business
component. There’s an alternative (“ASC”) method for
calculating the credit that works better for companies
whose research credits are declining or sales are
growing faster than research expenditures.
• A 30% credit for businesses installing qualified solar
energy property was extended through 2016.
28
Business
• The new markets tax credit (also extended) is for
investments in entities that lend money to firms in
poor areas. Investors get a 5% credit in the first three
years on the money they invest and 6% for the next
four years. But the break is reduced if investors can
claim low-income-housing credits as a result of their
investments. The credit is enhanced for investments in
the Gulf Opportunity Zone.
• The renewed work-opportunity credit (usable against
the AMT) applies for eligible employees who begin
work before Sept. 1, 2011: 40% of first-year wages
up to $6,000 (top credit: $2,400) An increased credit
can be claimed for hiring certain disabled vets, and for
hiring people in certain counties affected by natural
disasters: 40% of first-year wages up to $12,000. The
credit was also extended to two new categories for
hires in 2009 and 2010: unemployed youths age 16-25
and unemployed vets.
Unused business credits can be carried back one year and
forward 20 years.
Sam
ple
Business Deductions
How businesses increase their deductions:
• Buy supplies before year-end.
• Accelerate repairs into this year.
• Reduce or defer year-end income. Delay shipping until
next year. Make sales on consignment or approval.
Defer billing for services until the next month or
quarter, if you use the cash method.
• To get deductions a year earlier, advance into 2009
expense payments you expect to make in 2010.
• The deduction for business meals and entertainment is
50% of eligible expenses, with receipts required only
for expenditures above $75. You need an itemized bill
for lodging; a credit-card receipt is not enough. Outof-pocket costs are deductible only as miscellaneous
writeoffs subject to the combined 2% (of AGI) limit.
• Instead of buying your client a meal, only 50%
deductible, give a gift certificate (100% deductible) to
his or her favorite restaurant.
Business
29
Placed in Service 2009
Depreciation Schedule Vehicles
Cars
CARS
LIGHT
TRUCKS VANS
First Year
$2,960*
$3,060*
Second Year
$4,800
$4,900
Third Year
$2,850
$2,950
Fourth Year + $1,775
$1,775
*plus another $8,000 for vehicles that qualify
for the “bonus depreciation”
Sam
ple
Buyers of new vehicles (weighing less than 8,500 pounds)
bought in 2009 after February 16 get an above-the-line
deduction for the sales taxes or other fees (in states with
no sales tax) paid on the purchase. Taxes on the first
$49,500 of the purchase price qualify.
The standard mileage rate for business driving in
2009, 55¢ per mile, is usable for leased cars and for valuing an employee’s use of a company car, but not for two
or more cars used alternately for business. Employees
have income of 55¢ per mile for personal use of company cars that cost $15,000 or less and for trucks and vans
that cost $15,200 or less.
Employer-Provided Benefits
Employers can provide employees up to $230 per month
of free parking without taxation to either party, or may
offer a choice of cash or parking. Employees who choose
cash must include it in their income. Similar rules apply
to the current $230 allowance for mass transit.
Self-employeds and more than 2% owners of S
Corps: An above-the-line deduction is allowed for premiums on health-insurance policies held in the owner’s
rather than the company’s name if the company pays the
premiums or reimburses the shareholder for the them
and includes the amount on the W-2. Though shown
30
Business
as wages the payments usually are not subject to payroll
taxes. A sole proprietor whose spouse works for the
company can provide coverage for employees, spouses
and dependents. The owner’s coverage then is included
with the spouse’s: a business deduction and tax-free to
the employees and spouses.
Employers: if you can’t afford medical insurance
for your workers, Health Savings Accounts (HSAs) may
be the best substitute, less costly than traditional health
insurance. The company buys a high-deductible health
insurance policy and pays some or all of the premiums. It
then sets up an HSA for each employee. Earnings are taxdeferred and withdrawals for qualified uses are tax-free.
Sam
Qualified Retirement Plans
Firms can offer Roth 401(k)s, a fabulous benefit, but
must amend earlier 401(k)s to add this feature. Pay-ins are
from after-tax dollars, but after five years and age 59½ all
of any withdrawals are tax free. Contribution limits are
much higher for Roth 401(k)s than for Roth IRAs. And
there are no income limits on participants. Disadvantages
of Roth 401(k)s: non-discrimination and minimum-pay-
ple
Sea Stack Lake Superior
Apostle Islands National Lakeshore Wisconsin
The Apostle
Islands National
Lakeshore
located in northwestern Wisconsin is comprised
of
islands
and
miles of
mainland Lake
Superior shoreline The
area is
rich in wildlife
and geological
wonders includ
ing sea stacks
such as the one
pictured here
Business
31
out (after age 70½) rules apply, and employer matches
may not be tax favored. Employers must permit nonspousal IRA rollovers beginning in 2010.
Small employers may be eligible for a credit for the
start-up costs for a pension plan. First consider a Simplified Employee Pension plan (SEP) or a SIMPLE. With
a SEP you contribute directly to employees’ IRAs, and
avoid much paperwork and reports to the IRS. But you
must cover all eligible employees and you can’t make
matching contributions. An employer’s contribution can’t
exceed the lesser of 1) 25% of the employee’s pay up to a
maximum of $245,000, or 2) $49,000.
Only employees who earn $5,000 or more need be
covered by a SIMPLE. Employers must make contributions of either 2% of pay or match employee contributions up to 3% of salary and all eligible employees must
be covered. If you have low amounts of self-employment income (say, $25,000 or less), a SIMPLE may be
just right for you. If your self-employment earnings are
larger, consider a 401(k) or SEP.
Employers must put small ($5,000 or less) payouts
from retirement plans into an IRA if a departing employee fails to specify a payout option.
Sam
ple
Miscellaneous
If you buy more than 40% of your 2009 asset purchases
(excluding buildings) in the last quarter, regular depreciation on all 2009 purchases is figured on the mid-quarter
basis, so assets bought near year-end get less current year
depreciation. This is a complex area; seek professional
advice.
Even small businesses may qualify for the “manufacturing deduction” for gross receipts from the sale, lease
or rental of tangible personal property made in the U.S.
The definition of “manufacturing” is broad and this deduction is a bonanza many smaller companies overlook.
Consult with your tax advisor for the requirements and
guidelines.
A married couple who jointly own an unincorporated business can elect not to be treated as a partnership,
and instead file tax returns as two sole proprietors.
32
Business
2009 Income Tax Rates
Tax Rate
(%)
Taxable Income
$
0
16,701
67,901
137,051
208,851
372,951
-
16,700
67,900
137,050
208,850
372,950
∞
10
15
25
28
33
35
$
0
11,951
45,501
117,451
190,201
372,951
-
11,950
45,500
117,450
190,200
372,950
∞
10
15
25
28
33
35
$
0
8,351
33,951
82,251
171,551
372,951
-
8,350
33,950
82,250
171,550
372,950
∞
10
15
25
28
33
35
$
0
8,351
33,951
68,526
104,426
186,476
-
8,350
33,950
68,525
104,425
186,475
∞
10
15
25
28
33
35
$
0
2,301
5,351
8,201
11,151
-
2,300
5,350
8,200
11,150
∞
15
25
28
33
35
Married,
Filing Jointly
Head of Household
Sam
Single
Married,
Filing Separately
Estates & Trusts
ple
Exemption Per Person: $3,650
The highest earners get a $2,433 exemption.
2009 Standard
Deduction
Under Age
65
Age 65 and
older
$12,500 (one spouse
Married, Filing Jointly
$11,400
65 or older)
13,600 (both spouses
65 or older)
Head of Household
8,350
9,750
Single
5,700
7,100
Married, Filing Separately
5,700
6,250
Blind taxpayers get an extra $1,100 if married, $1,400 if single.