Year-End Tax Planning

 

It is that time of year again.  Never mind the jingle bells, the holiday shopping, the college football, and the endless buffet of holiday treats.  It is time to close one tax year and make plans for the next.  While this is a busy season for everyone, there is still time to save big by assessing the client’s personal tax plan.  So here is the first Christmas gift of the season, five year-end tax planning tips that can save money and put more presents under the tree.

 

 

#1.  Adjust Federal and State Withholding.

If the client expects to owe any additional taxes in April, or if he or she will face a penalty for underpayment of tax, now is the time to make that final estimated tax payment, or to ask the client’s employer to increase wage withholdings.  If at all possible, the withholding method should be used.  Withholding is preferable because the IRS treats all withheld tax dollars as if paid evenly throughout the calendar year.  The taxpayer can use fourth quarter withholdings to cover the tax on first quarter income.  By contrast, a quarterly tax installment is tied to the date of the client’s check.  Any lapse between the date of the income and the date of the tax payment will be subject to underpayment penalties. 

 

State tax withholding provides a double bonus.  Not only does the client reduce the potential state underpayment penalty, he or she also deducts the payment in the federal tax calculation.  The client owes less federal tax because of the state tax payment. 

 

But what if the client is retired?  Most retirement plans and IRAs allow the beneficiary to adjust federal and state withholdings from the retirement distributions.  The client may even schedule an additional IRA distribution just to have most of the money devoted to federal and state withholdings.

 

 

#2.  Take the Revised Homebuyer Credit.

The homebuyer credit has recently been amended to benefit even more taxpayers.  If a client is thinking about buying a home, there are three reasons why now may be the perfect time.

 

First, the credit deadline has been extended for principal residences bought before May 1, 2010 and for purchases that are closed before July 1, 2010 so long as the buyer enters into a binding, written contract before May 1, 2010.  If the client is a service member on qualified official extended duty, he or she may get another extra year to buy a qualifying home. 

 

Secondly, the credit now applies not only to first-time homebuyers but also to existing homeowners who are “long-time residents.”  If the client has maintained the same principal residence for five consecutive years out of the preceding eight, the client may qualify for a homebuyer’s credit that is equal to the lesser of $6,500 or 10% of the purchase price.  Note that there is no requirement that the client must sell his or her current residence, but the client must occupy the new home as a principal residence.

 

Lastly, the revised homebuyer credit has higher phaseouts than before.  For individuals, the phaseout range is from $125,000 to $145,000.  For married couples filing jointly, the range is from $225,000 to $245,000.  However, there is a new home price limit.  The credit will be completely disallowed if the purchase price exceeds $800,000.

 

 

#3.  Flexible Spending Accounts (FSAs): Use it or Lose it.

FSAs allow employees to set aside pre-tax dollars that can be used to reimburse qualified medical and other expenses.  The benefit of an FSA is that the client gets to use pre-tax dollars for expenses that may otherwise not be deductible, such as over-the-counter medications. 

 

If the client has already set aside money in an FSA, now is the time to check the balance if the client has a calendar-year plan.  FSAs are a “use it or lose it” type of benefit plan.  If the client does not take advantage of the funds before they expire, he or she will not be able to utilize the savings in the future.  The client should also check to see if the plan has an optional grace period that will extend the time for reimbursement.

 

This is also the time to plan for next year’s FSA.  To determine how much the client should set aside next year in the FSA, he or she should look at the funds utilized this year and take into account any changes in circumstances for next year.  If the client does not use the employer’s FSA plan, perhaps he or she should take advantage of the opportunity.

 

 

#4.  Apply NOLs to Prior-Year Returns. 

The “Worker, Homeownership, and Business Assistance Act of 2009” allows even more businesses than before to get immediate tax savings from net operating losses (NOLs).  Instead of being able to carry back NOLs only two years, many companies can now qualify for extended carryback periods of three, four, or even five years.  If the client’s company has been profitable in recent years but has suffered a current loss, he or she may be able to utilize even more of that loss to get immediate refunds of previous taxes paid.

 

 

#5.  Use the Annual Gift Tax Exclusion.

This is the simplest estate planning tool available to reduce a client’s taxable estate.  Give the money away.  For 2009, the annual gift tax exclusion is $13,000 per recipient.  If the clients are married and elect to “split” the gift, they can give each person up to $26,000 without paying gift tax.  Either spouse can write the check.

 

Of course, if the client wants to help a loved one by assisting with tuition or medical expenses, it is best to pay the school or medical facility directly.  Such gifts are tax-free regardless of the amount.  For example, if the client pays $40,000 to a grandchild’s school for tuition, he or she will not be subject to gift tax.  However, if the client gives the grandchild $40,000 to be used for school, the client will be subject to gift tax on the amount in excess of the $13,000 annual exclusion.

 

Grandparents (and others) can supercharge annual exclusion gifts with a 529 college savings plan.  These accounts grow tax-free, and can be used for college books, fees, room, board, and even tuition.  Under Section 529, a donor can immediately sock away five times the annual exclusion amount (5 x $13,000 = $65,000) for a college bound donee without incurring gift tax.  The gift is counted as that donor’s annual exclusion gift to that donee for the next five years. 

 

So, why not just sprinkle the money into the plan over the five year period?  The $65,000 will earn tax-free income longer if invested at the beginning of the five year period.  In addition, South Carolina allows a state income tax deduction for contributions to the official South Carolina 529 plan.  The wealthiest donors can eliminate their South Carolina income tax liability altogether.

 

 

Bonus Tip: Call Crain Law Firm.

Each client’s tax situation is different and deserves individual attention.  If you have any questions about these ideas or your personal tax planning, please give me a call.  I would be happy to help.

 

J. Kevin Crain 

CRAIN LAW FIRM, LLC

636-G Long Point Road #95

Mt. Pleasant, South Carolina 29464

Phone (843) 735-7602

Fax (843) 735-7002

Mobile (843) 327-7744

Email kevin@kevincrain.com