How Tax Planning Has Changed

In years past, year-end tax planning involved two variations on one theme—reduce this year’s taxes by deferring or postponing income and gains, and by accelerating deductions. This year may be different. President Obama’s 2010 budget calls for tax increases, particularly for high-income taxpayers.
The proposed budget includes reinstating the 36% and 39.6% top tax rates on wages and other ordinary income (up from the current 33% and 35% rates) and increasing the maximum tax rate on dividends and capital gains to 20% (up from the current 15% maximum rate). In addition, the healthcare plan being debated in Congress is to be funded in part by an increase in taxes in the form of a 1% to 5.4% surtax on the adjusted gross income of high-income taxpayers.

Will these tax increases become law in  2010? Maybe yes and maybe no; it would take a crystal ball to know for sure. However, the prospect of such increases suggests caution in terms of the aggressive use of the traditional year-end tax planning tools of income deferral and deduction acceleration, and the need for a longer-term, multi-year view of tax planning.
In a cross current, numerous tax incentives are included in recently enacted legislation, particularly the American Recovery and Reinvestment Act (also known as the Stimulus Act). Many provisions of the Stimulus Act use tax breaks to encourage spending, particularly by businesses.
Where Are You Now?
Start with your 2008 tax return, which may still be fresh off the printer given the extended due date of October 15th for individuals and September 15th for most businesses. Do a projection of likely income, gain, and loss events for yourself or for your business through the end of the year. Estimate deductible expenses. Call your tax professional (or, if you are up to it, do it yourself using 2009 tax-preparation software) and do a draft 2009 individual, corporate, or partnership tax return based on the year to date and reasonable estimates through the end of the year.
The federal tax rates are the same as last year, and most deductions and credits available in 2008 are available in 2009 for both individuals and corporations. Your 2009 draft tax return then can be tinkered with using various “what if” scenarios.

Remember AMT
Drafting a 2009 return and running various “what if” scenarios will allow you to determine whether or not you will be an alternative minimum tax (AMT) taxpayer, or how close you might be. AMT has its own set of rates and its own rules for deductions, which usually are less generous than they are for standard taxpayers. AMT also ignores some itemized deductions, such as investment expenses and some medical and dental expenses. AMT also affects incentive stock options exercised during the year, and certain write-offs related to ownership of a business, rental properties, partnership interests, or S corporation stock.
One classic year-end planning technique is paying extra state and local taxes by December 31 in order to get the itemized deduction for taxes in the current year. This is particularly relevant and appropriate this year for New Yorkers because of the large increases in New York State tax rates effective for 2009. However, if you qualify as an AMT taxpayer, prepaying state and local income taxes will not give you a benefit, given that such taxes are not deductible in calculating AMT. Does the tax go down or stay the same if an expense (such as state taxes) is paid by year end?

Take Advantage of the Stimulus Act
As stated above, the Stimulus Act contains billions of dollars in tax incentives for businesses. Below are some of the tax incentives that may apply to your business.

Bonus Depreciation. The Stimulus Act extends the ability of businesses to accelerate the normal cost-recovery schedules for depreciable property by immediately writing off half the cost of qualified depreciable property (e.g., computers, equipment, certain land and tenant space improvements), in addition to regular depreciation, for property purchased and placed into service in 2009.

Election to Accelerate Recognition of Historic AMT or R&D Credits. Businesses may elect to accelerate the recognition of their historic AMT or R&D credits in lieu of bonus depreciation. The amount accelerated is based on the amount invested in property otherwise eligible for bonus depreciation, and is capped at the lesser of 6% of historic AMT and R&D credits or $30 million.

Small Business Expensing. In 2009, businesses are allowed to expense up to $250,000 of equipment, subject to a phase-out for businesses with total capital expenditures in excess of $800,000.