Tax Planning for 2009 and 2010
As seen on WCPO Channel 9 Cincinnati

William E. Hesch, Esq., CPA, PFS

September 12, 2009

President Barack Obama released his Fiscal Year 2010 Revenue Proposals in May, 2009.  Most of the proposals affect tax years 2011 and beyond.  The proposals are summarized in 131 pages of detailed Revenue Changes, Loophole Closers, Upper Income Tax Increases, User Fees, Revenue Increases Dedicated to the Health Reform Reserve Fund and Other Initiatives.

I.  Tax Strategies for 2009 and 2010

A.          The upper income taxpayers need to begin planning for higher taxes in 2011.  The 2009 and 2010 highest 35% bracket will be replaced by 36% and 39.5% tax brackets in 2011.  This change affects married taxpayers whose taxable income is greater than $250,000 and $200,000 for single taxpayers.  The 2010 strategy will be to have income taxed at 35% instead of the higher tax rates.  For 2009, high income taxpayers should try to balance their 2009 and 2010 incomes so that income is kept in lower tax brackets, if possible.

              For 2011, upper income business owners who are personally taxed as S Corporations and partnerships may want to have their business taxed as a C Corporation since the maximum tax rate for a C Corporation is being kept at 35%.

B.           Lower income tax bracket taxpayers should take advantage of the 0% Capital Gain/Dividend Tax Rate that is available for 2009 and 2010.  President Obama will not allow this Bush tax break for lower income tax bracket taxpayers to continue in his budget for 2011 and beyond.  Married taxpayers whose income is below $65,000 and single taxpayers whose income is below $32,000 should plan to sell stocks or other investments so that their taxable income including the capital gains is below those thresholds.  In doing so, they will have no tax owed on the capital gains recognized in 2009 and 2010 since they will be in the 10% and 15% tax brackets.

C.          Upper income taxpayers are eligible to convert their regular IRAs into Roth IRAs beginning in 2010.  This President Bush tax break is a revenue raiser for the IRS in 2010, but may save taxes in the future for upper income taxpayers since the Roth IRA allows taxpayers to pay no tax on Roth IRA distributions in the future.  Generally, this is a good strategy if the taxpayer believes they will be in a higher tax bracket in the future when the regular IRA would be distributed and subject to tax.  Also taxpayers can accumulate more money in the Roth IRA than the regular IRA since Roth IRAs are not required to make annual required minimum distributions. 

D.          Taxpayers are also not required to take 2009 distributions from their regular IRA.  Required minimum distributions have been suspended for 2009 and taxpayers need to contact their bank or financial institution to make sure there is no distribution made in 2009 if they want to keep the money in the IRA to rebuild their retirement nest egg.

E.           Many taxpayers have lost their jobs in 2009 or business owners have incurred significant losses in 2009.  As a result, these taxpayers may have taxable income in lower tax brackets.  It may be advantageous to accelerate income into 2009 by taking IRA distributions (beware of the 10% penalty) so that the income is not taxed due to offsetting business losses or is taxed in lower tax brackets or is not subject to tax since it may be offset by mortgage interest, other tax deductions or tax credits that would otherwise not be utilized. 

F.           With the stock market incurring significant losses, taxpayers may have capital losses in their investment portfolio.  The 2009 tax strategy would be to sell stocks with losses to offset 2009 capital gains as well as at least $3,000 in losses above your capital gains so that the $3,000 loss can offset other taxable income for 2009.  The capital loss is only deductible if you sell the stock and do not buy it back within 30 days of the date of sale.