2009 Year-End Tax Planning – Part 1

Well, 2009 has flown by and it is time once again to start thinking about year-end tax planning and any opportunities available to lower your tax bill.  Whether you are have a complex business, investments, or just a simple individual tax return; you should take some time before the holidays get too busy to examine how things are looking for the year and look for any planning opportunities.

If you have not read the It’s Only Money column that was in the Sunday Oregonian entitled “Act Now to Save on 2009 Tax Bill”, make sure you check it out.  We had the opportunity to contribute to the small business section of the article, and it has some good information throughout.

There is a lot of ground to cover, but in Part 1 of this post I will concentrate on individual tax planning and opportunities related to your primary residence:

First-Time Home Buyer Credit Extension:

Most people are familiar with the existing first-time home buyer credit that was extended, but the new reduced credit for “long-time homeowners” is a great opportunity as well that some have not looked into.

• $6,500 credit ($3,250 married filing separately)
• Have to have owned and used the same principal residence for any 5 consecutive year period during the previous eight-year period ending with the date on which the new residence is purchased.
• Income phase-outs have been increased and start at $125k for single and $225k for joint returns.  For taxpayers near the phase-out limits, eligibility can be met with some good year-end tax planning.
• The extended date is 4/30/10; however, it is important that people realize that they just have to enter into a binding contract before 5/1/10 and close by 7/1/10.

I think that this will become popular for those looking to upgrade or downsize – especially after we get passed the holiday season.  However, one note of caution – if you are newly self-employed (within the last year or more), it is extremely to get a mortgage right now.  The new requirement is that you have to have two years of tax returns as a self-employed individual to prove the income.  If you have less than two years of self-employed returns, you may be looking at a serious road block keeping you from taking advantage of the new credit.

Residential Energy Property Credit:

This credit is 30 percent of the sum of expenditures for qualified energy efficiency improvements, including windows, furnaces, water heaters, heat pumps, and more, which are placed in service in 2009 and 2010, which is limited to $1,500 for 2009 and 2010.  The improvements must meet strict energy efficient standards, so taxpayers should do their homework on this one as a mistake could be costly.

Avoid an Unwelcome Surprise:

Lastly, if you are struggling financially due to a loss of a job or reduced income and are behind on mortgage payments and property tax on your primary residence, understand that this could change your 2009 taxes and you could be looking at an unwelcome surprise if you are significantly behind.  For many, interest and property taxes are very significant itemized deductions, so a few month’s worth of unpaid mortgage payments could really increase your tax liability.  It is not something you want to hear if you are in that situation, but it is something to be aware of, and if you can make a payment by the end of the year, it will help your tax situation.

Oregon IDA Tax Credit

Tis’ the season for making your final charitable contributions for the year and helping out your community at the same time.  If you are going to make only one contribution this year, I would highly suggest contributing to Oregon’s Individual Development Account (IDA) Initiative.

 With a normal charitable contribution, you get an itemized deduction on the Federal and State returns; however, an IDA contribution give you an Oregon credit and a Federal itemized deduction.  Here is how it works:

• you get a 75% OR credit to offset your tax liability (code 715 on the OR40 form),
• you take the full contribution on your Federal Schedule A as an itemized deduction,
• finally you have to claim an other addition labeled “715” on your Oregon return as you cannot claim a deduction for an item you are using for a credit.

Here is what it looks like with numbers based on a total contribution of $100:

• OR credit would be $75,
• Federal itemized deduction for charitable contributions would be the full amount of $100,
• the other addition to Oregon income would be $100 ($75 credit divided by 75%).

Even with the other addition to income, the IDA contribution is a great deal!  However, make sure you will have Oregon tax liability, as in certain cases the credit would not be beneficial.  The best part is that I just emailed Cynthia Winter, the IDA Program Director, and the credits are still available at this point.