Year End Newsletter 
and Tax law Changes For 2009

November 16, 2009

Dear Clients and Friends:

It is that time of year when you should be looking at your tax picture to determine if there is something you can do now to reduce your 2009 tax liability. In 2009, the American Recovery and Reinvestment Act was signed into law as was the Worker, Homeownership, and Business Assistance Act (the significant provisions of this law are covered in an addendum). This letter summarizes current law, changes that went into effect in 2009 and changes that are supposed to go into effect in later years. It also outlines year-end planning suggestions and the impact they may have on your current and future tax picture. Some of the changes that should have the biggest impact on you are:

• Making Work Pay Credit
• Enhancements and Extensions of Residential Credits 
• Convert Your Traditional IRA into a ROTH IRA
• Waiver of Required Minimum Distribution (RMD) Rules for 2009 only 
• Starting 2009 – Home Sale Exclusion May Be Reduced
• Sales Tax Deduction for Vehicle Purchases in 2009 for Non-itemizers 
• Homebuyer Tax Credit Extended and Enhanced 
• Expiring in 2009

Higher Education Tuition Deduction
Teacher’s Classroom Expense Deduction 
Property Tax Deduction for Non-Itemizers 
State and Local Sales Tax Deduction 
Enhanced Asset Expensing Election 
50% First Year Bonus Depreciation 
Leasehold and Restaurant Improvements 15-year Recovery Period 

• In 2010, electronic filing ("e-filing") of your 2009 tax return will be available. In 2011, the law has been changed to make it mandatory for the clients of paid tax preparers to e-file tax returns (with limited exceptions).

You should look at how your life changed in 2009. Has your marital status changed, did you adopt or have a child, open a home business, change jobs, buy or sell a home, pay off or re-finance a mortgage, pay for college tuition? All of these items could affect your tax picture.

Also, remember that effective tax planning requires considering both this year and next (at least). Without a multi-year outlook, you cannot be sure that planning intended to save taxes on your 2009 return will not backfire and cost you additional money in the future. (See last page for "Quick Tax Facts - Tax Changes..." chart.)

With President Barack Obama’s plan to raise taxes for those who make more than $250,000, you may want to accelerate income into 2009 and defer deductions to 2010. See pages 5 and 7.

Lowering your taxes starts with tax planning. This newsletter is your guide to use year round. Feel free to contact us at anytime to discuss any of these tax planning ideas and how they may affect your personal tax situation.

Here's an abbreviated table of contents.

- INDIVIDUALS -

The following credits are available for 2009. They provide a dollar-for-dollar reduction in your income tax liability.

Taxpayers who purchase their first principal residence (meaning, you did not own a principal residence during the three-year period before the current purchase) on or before November 30, 2009, may be eligible for a credit on their tax return of up to 10% of the purchase price of the home or $8,000, whichever is smaller. The credit phases out for married taxpayers with an AGI between $150,000 and $170,000 and for single taxpayers with an AGI between $75,000 and $95,000. In some instances, the credit has to be paid back. For 2008, the maximum first-time homebuyer tax credit was $7,500 and it was required to be paid back to the IRS over 15 years (in some cases, sooner).

The Hope Scholarship Credit was temporarily enhanced and renamed the American Opportunity Tax Credit. For 2009 and 2010 only, the credit is increased to a maximum of $2,500 per year, is allowed for all four years of college and will allow course materials (but not room and board) as qualifying expenses. The tax credit is equal to 100% of the student’s first $2,000 of tuition, fees, and course materials and 25% of the next $2,000. The student must be enrolled on at least a half-time basis. This credit is phased out for joint filers with an AGI between $160,000 and $180,000 and for single filers with an AGI between $80,000 and $90,000. In addition, up to 40% of this credit is refundable.

The Lifetime Learning Credit can be used for undergraduate and graduate level courses (including courses to acquire and improve job skills). For 2009, the credit is equal to 20% of up to $10,000 of qualified expenses. The maximum credit is $2,000 per tax return and is available anytime. The only restriction is that only one education credit may be used in the same year, for the same student.

The Lifetime Learning Credit is phased out for joint filers with an AGI between $100,000 and $120,000 and for single filers with an AGI between $50,000 and $60,000. No credit is allowed for married persons filing separately.

Since there are income limitations, it may be more advantageous for a parent to forgo the dependency exemption and not claim the student as a dependent on their Form 1040. If the student has a sufficient tax liability to absorb the credit, the student will file his or her own tax return and take the credit. Also, the student can take his/her own personal exemption if he/she provides more than one-half of his/her own support. This could reduce the overall tax liability of the family.

A $1,000 Child Tax Credit is available for each child under the age of 17. The credit is phased out for married taxpayers filing jointly with AGI's in excess of $110,000, $75,000 for single taxpayers and $55,000 for married taxpayers filing separately. Under certain circumstances, the credit may be refundable. The maximum credit of $1,000 is scheduled to stay in effect through 2010.

If you and your spouse work and have childcare expenses for children under age 13, a credit of up to $600 per child (maximum credit $1,200) is also available. The credit is equal to 20% of your eligible employment related child and dependent care expenses; the maximum expenses counted are $3,000 for one dependent or $6,000 for two or more dependents. The credit may also be available for the cost of taking care of an elderly parent you support or a spouse who can’t care for themselves.

Eligible lower-income taxpayers may claim a credit for elective deferrals to qualified retirement plans and IRAs (including ROTH IRAs). The credit rate (50%, 20%, or 10%) is for contributions of up to $2,000 per taxpayer and depends on your filing status and AGI. The credit is phased out for joint filers with an AGI of more than $55,500 and for single filers with an AGI of more than $27,750. To qualify, you must be at least 18 years old but cannot be a full-time student or be claimed as a dependent by another.

You can receive a credit for the purchase or lease of a car or truck powered by certain alternative fuels. For 

hybrid and lean burn vehicles, the credit can be as much as $3,400, however, the credit is phased out when a manufacturer sells 60,000 of these vehicles. Fuel cell and other alternative fuel vehicles may qualify for larger credits. Starting in 2009, the credit may be applied against your AMT tax.

C) Residential Energy Efficient Property Credit

An unlimited credit equal to 30% of the cost of qualified property (the maximum was removed) is available for installing solar photovoltaic property, solar water heating, fuel cell property, small wind energy equipment and geothermal heat pumps. The credit for fuel cells is limited to $500 and is only available for your principal residence. None of these purchases can be used to heat hot tubs or swimming pools. This credit can offset AMT liabilities.

Even if you or your children are out of school, you may be able to deduct up to $2,500 of interest paid on student loans (no deduction is allowed for AGI's of more than $150,000 for joint filers and $75,000 for single filers). You do not have to itemize in order to take this deduction.

If you can not claim the American Opportunity or Lifetime Learning Credit, you may be eligible to take an above the line higher education tuition deduction. This deduction is scheduled to expire after 2009. A $4,000 deduction is available to joint filers with AGI’s of $130,000 or less and to single filers with AGI’s of $65,000 or less. The deduction is reduced to $2,000 for joint filers with AGI’s between $130,000 and $160,000 and for single filers with AGI’s between $65,000 and $80,000.

2009 is the last year that an above the line deduction of up to $250 is available to education professionals (kindergarten through grade 12) for out-of-pocket classroom expenses. Expenses exceeding this amount may be deducted as an employment related miscellaneous deduction subject to a limitation of two percent of AGI.

The above the line deduction for health insurance paid by self-employed individuals is 100%. A 2-percent shareholder-employee in an S corporation is eligible for the deduction only if the premiums are paid or reimbursed by the S corporation and the premiums are included in the W-2 of the shareholder-employee as wages. This W-2 income is not taxable for social security or Medicare purposes.

Consider establishing a HSA account if you have medical insurance with a high deductible. You can take an above the line deduction for a HSA contribution (up to $6,950, but various limits apply) and then use the funds in the HSA to pay for medical expenses now or in future years. Without a HSA, medical expenses must be more than 7.5% of your AGI before an itemized deduction is allowed.

Deductible IRA contributions of up to $5,000 can be made for 2009. For those individuals 50 and older, IRA catch-up provisions increase the contribution limitation to $6,000. If you and your spouse are active participants in employer sponsored retirement plans, you are eligible to make deductible IRA contributions if your AGI is below $89,000 if married filing jointly and below $55,000 for single individuals. The deduction is phased out between $89,000 and $109,000 (joint) and $55,000 and $65,000 (single). For joint filers where one spouse is not an active participant and the other is, a deduction is allowed for the non-active spouse when the AGI is below $166,000. A contribution can also be made for a non-working spouse under most circumstances.

If you cannot make a deductible or Roth IRA contribution because of limitations, consider making a non-deductible contribution. The earnings are tax-deferred until you take withdrawals.

If your child has earned income from a summer job or baby-sitting, consider a deductible IRA or non-deductible Roth IRA. They can make IRA contributions up to the smaller of their earned income or $5,000.

Consider a Roth IRA Contribution or Rollover

Roth IRA distributions are tax-free (see below) but the contributions are not deductible. You can split a contribution of up to $5,000 per person, between a traditional and a Roth IRA (for example, $2,500 to each, subject to AGI limitations). In addition, a $1,000 "catch-up" contribution is allowed for taxpayers age 50 or older. Eligibility to contribute to a Roth IRA phases out for married couples filing joint returns with an AGI between $166,000 and $176,000 and for single individuals with an AGI between $105,000 and $120,000. Earnings grow tax-free in a Roth IRA and distributions are tax free if they are made after a five-year holding period and are after 1) age 59-1/2, 2) death, 3) disability, or 4) the purchase of a first-time home (lifetime maximum of $10,000). The Roth IRA does not require distributions after the age of 70-1/2 like a traditional IRA. Also, contributions can be made to a Roth IRA after 70-1/2.

Individuals may be able to contribute to a Roth 401(k) plan (if the plan is amended to accept such contributions). Roth 401(k) contributions do not reduce your taxable wage income; however, earnings grow tax-free and distributions are tax free. The annual contribution limit is higher than a Roth IRA. You can contribute $16,500 in 2009; $22,000 if you will be 50 by December 31, 2009.

In 2010, the AGI restriction is eliminated and higher-income taxpayers will be allowed to convert their IRA accounts. In addition, for Roth conversions that occur in 2010 only, taxpayers can include half of the amount in taxable income in 2011 and the other half in 2012.

Maximize your contributions to employer-sponsored retirement savings plans before year-end. Your contributions and any earnings on those contributions generally won’t be taxed until you begin receiving funds from the plan. You may be able to contribute up to $16,500 to a 401(k) or 403(b) plan. For those individuals 50 or older an additional $5,500 may be contributed (if the plan permits catch-up contributions to be made). Additionally, the maximum annual deferral limit in a SIMPLE plan is $11,500, and those age 50 or older can make extra, catch-up contributions of $2,500 (if the plan permits catch-up contributions to be made).

Extended through 2009, taxpayers who are age 70-1/2 or older can have up to $100,000 distributed from their IRA directly to a tax-exempt charity and avoid paying tax on the distribution. This includes amounts that are required minimum distributions. It does not apply to distributions from SEPs or Simple IRAs. This benefits taxpayers who would donate to the charity anyway and do not itemize deductions or whose itemized deductions are phased out.

For 2009 only, the minimum required distribution is waived. Eligible taxpayers are not required to take a distribution in 2009 and they will not be subject to a 50% penalty for failure to do so.

Workers who move from job to job have flexibility when it comes to investing their retirement funds. Tax-free rollovers are permitted between different types of plans. And more choices are available to surviving spouses who want to roll over a decedent’s distributions. A surviving spouse may roll over a distribution from a qualified plan or IRA into an IRA or into a qualified plan, 403(b) annuity, or 457 plan in which the surviving spouse participates.

In addition, a tax-free rollover of direct trustee to trustee transfers from a deceased person’s IRA or retirement plan into a non-spousal beneficiary’s IRA will be permitted. The rolled-over amounts will be subject to the minimum required distributions rules that apply to inherited IRAs.

If you will be in a lower tax bracket in 2010 (versus 2009), it may pay to receive income in 2010 rather than in 2009. For example, ask your employer to defer your year-end bonus until January 2010 or if you change jobs, don’t take cash distributions from your company retirement plan. Leave the money in the plan or roll it over to an IRA or other qualified plan. Also, you can invest excess cash in Treasury bills that don’t mature until next year or in certificates of deposit that won’t let you take out interest without penalty until 2010. In each case, all of the interest earned would be reported on your tax return for 2010 that will be filed in 2011.

However, if you expect to be in a higher tax bracket in 2010 (for example, your spouse may be returning to work next year or if you plan to marry in 2010 and you and your spouse will both have income) or your head-of-household or surviving spouse status ends after 2009, income deferral is not the best tax strategy.

If you will pay AMT for 2009 but not for 2010, accelerating income into 2009 may produce tax savings.

Capital gains on sales of investments are taxed at different rates, depending on how long you have owned the investment. For most investments owned more than one year, the maximum capital gain rate is 15% for individuals in the 25% and higher tax brackets effective through 2010. People in the 15% or 10% tax bracket will pay a 0% tax on their long-term capital gains for 2009 and 2010. Long-term capital gains attributable to depreciation from real estate will be taxed at a maximum rate of 25%. The gains on collectibles (antiques, artwork, stamps, etc.) will be taxed at a maximum rate of 28%. Certain small business stock is taxed at a maximum effective rate of 14% but may cause an AMT tax. The gain on an investment owned a year or less may be taxed at your ordinary income tax rate, which can be as high as 35%.

Based on the various rates, you should consider the length of time you’ve held an investment before you sell. For example, postpone taking gains on appreciated investments until the more-than-one-year holding period has passed.

Under current tax law, every dollar of capital loss can be used to offset capital gains. If you have an overall capital loss, you can deduct it dollar-for-dollar against ordinary income (compensation, dividends, interest, etc.), up to a maximum of $3,000. Therefore, if you have gains, it might make sense to generate some offsetting losses on investments that have declined in value in the current market turmoil. Any net losses in excess of up to $3,000 will be carried forward to 2010 and beyond until you have enough gains to use it up. This may save even more taxes if the tax rates increase. Be careful to avoid the "wash sale" rule on losses if you plan to replace the investments that were sold with substantially identical securities. Conversely, if you expect high losses in 2010, you may want to postpone realizing gains until then. Remember to include mutual fund long-term capital gain distributions in your planning.

Qualified dividend income (i.e., certain dividends from mutual funds and stocks including any privately-held C corporation in which you were a shareholder) continues to be taxed at a top rate of 15% through 2010 and at 0% for taxpayers in the two lowest brackets for 2009 and 2010. There are certain restrictions with respect to the holding period of the security.

Children under the age of 19 and students under the age of 24 will be taxed at their parent’s rate when investment income is greater than $1,900. For income less than $1,900, he/she may have an effective tax rate of only 5%. Since interest, dividend and capital gain income over $1,900 is taxed at the parent’s rate (up to 35%), parents should consider making gifts to their children of assets that are likely to appreciate over the long-term over assets paying dividend and interest for their children.

There is no tax on the income in a Coverdell education savings account and the distributions are also tax-free if used for qualified expenses which include a wide array of education expenses, such as elementary and secondary public, private, or religious school tuition and expenses, extended day programs, computer purchases and connections to the internet. The non-deductible annual contribution limit to such an account is $2,000 but is reduced if your AGI exceeds $190,000 for married taxpayers filing jointly or $95,000 for single taxpayers. Contributions for 2009 may be made as late as April 15, 2010.

Qualified tuition programs (also called "Section 529 Plans") generally allow taxpayers to buy tuition credits or certificates for their children, grandchildren, nieces, nephews, etc. or to make contributions to an account set up to meet their qualified higher education expenses. Distributions are tax-free if used for qualified higher education expenses (e.g., college tuition and, for 2009 and 2010, computers and computer technology, which includes internet access). A special gift tax election applies to qualified tuition programs; it enables you, your parents, brothers, sisters, etc. to gift up to $65,000 in a single tax year to the program on behalf of a beneficiary and avoid all transfer taxes. However, the annual gift tax exclusion becomes $-0- (instead of $13,000) for five years so that any other gift to that beneficiary is subject to gift tax.

If your child has a UGMA or UTMA account set up in his/her name, you can transfer the funds into a 529 plan. However, because a 529 plan takes only cash, the UGMA/UTMA investments must be sold and any applicable tax paid. In addition, a UGMA/UTMA 529 plan will be subject to the rules for both types of accounts.

Investing for appreciation instead of current income usually makes sense at any tax bracket. It is better to pay taxes later rather than sooner (unless it pushes you into a higher tax bracket or because tax rates are going up); you will earn more because of compounding.

Since consumer interest expense (i.e. credit cards, auto loans) is not deductible, you should take steps to minimize it. A good source of funds to pay off consumer debt is a home equity loan, especially with the current low interest rates. Interest on a loan of up to $100,000 that is secured by your home is fully deductible (but may cause an AMT tax). However, be careful, because if you default on the loan, you could lose your home.

You can claim an exemption for yourself, your spouse, your qualifying children and any other qualifying relative (if you provide over half of the relative's total support and his/her gross taxable income is less than $3,650).

In addition, if you are single, you can file as head of household (which is more favorable) if you claim a parent as a dependent (see above) and you pay for more than half of the cost of maintaining their residence...even if it is a rest home or old age home. Single parents may also qualify as head of household.

2009 is the last year taxpayers who can not itemize deductions will be able to increase their standard deduction by the smaller of the real property taxes they paid or $1,000 for married taxpayers and $500 for single taxpayers. This means that married taxpayers may be able to increase their standard deduction from $11,400 to $12,400, single taxpayers from $5,700 to $6,200 and head-of-household taxpayers from $8,350 to $8,850,

If you itemize deductions, you can deduct state and local sales taxes if you do not deduct state and local income taxes. Since Florida does not have an income tax, Florida residents will deduct sales taxes. If you are considering purchasing big-ticket sales tax items, you should consider purchasing them before 2010 as this deduction is scheduled to expire.

For vehicles purchased on or after February 17, 2009 and before January 1, 2010 there is a deduction available for sales and excise taxes paid on the purchase price (on up to $49,500) of the vehicle. Taxpayers who cannot itemize will be able to increase their standard deduction by the amount paid. If you itemize deductions and you elect to deduct state and local income taxes instead, the new deduction is not allowed. The deduction is phased out for married and single taxpayers whose AGI exceeds $250,000 and $125,000, respectively.

Deduction for Premiums on Private Mortgage Insurance

Premiums paid for private mortgage insurance contracts issued after 2006 continue to be deductible through 2010. This deduction is phased out for married and single taxpayers with AGI’s greater than $100,000.

"Bunch" Deductions into 2009 or 2010

For 2009, marriage penalty relief continues to be in effect, increasing the standard deduction to $11,400 for married couples filing joint returns. This amount is double the standard deduction for single individuals, which is $5,700 (for those over 65, the amount is higher).

Unreimbursed medical expenses are deductible only after they exceed 7.5% of your AGI. Consider longterm care insurance; certain policies are treated as medical expenses, but only after separate limitations are applied. Miscellaneous itemized deductions such as unreimbursed employee expenses are deductible only after they exceed 2% of AGI. Bunching deductions into a single tax year (2009 or 2010) can help beat these limitations. Also consider paying your January 2010 state estimated tax in December 2009. Be careful not to offset this planning technique by shifting income into the year in which you bunch deductions or by creating an AMT tax.

Watch out for the rule designed to discourage "excessive" bunching by higher income people. Part of your itemized deductions are disallowed when your AGI exceeds $166,800 ($83,400 if married filing separate). This "antibunching" rule does not apply to medical deductions. At a minimum, you can take 20% of your itemized deductions (after figuring the 7.5% medical and 2% miscellaneous limitations) or the standard deduction, whichever is larger. Because you always get the standard deduction, it may still pay for you to bunch deductions.

The antibunching rule is being phased out from 2006 through 2009; it should not apply in 2010 but is supposed to reappear in 2011.

There is no deduction allowed for donations of used clothing and household goods that are not in good condition unless it is a single item worth more than $500 for which a qualified appraisal is attached to your return.

Cash donations are not deductible unless the donor has either a cancelled check or a written communication from the charity that adequately documents the donation. For cash donations greater than $250, you must obtain a charity-provided statement which states 1) the amount of cash or the property donated and 2) whether the donee organization provided any goods or services in consideration for the cash or property donated.

Give Property to Charity

If you plan to make a contribution to a public charity before year-end and you own appreciated stock, consider keeping your cash and donating the stock (or mutual fund shares). By doing this, you avoid paying tax on the donated stock’s appreciation but still receive a deduction for the stock’s full value (as long as you’ve owned it for more than one year prior to the donation). The charity also benefits because it can sell the property and not pay taxes on it. On the other hand, if you own depreciated stock, consider selling the stock and then donating the proceeds to charity; you may be able to deduct both your capital loss and your contribution. Consider a charitable trust if you want income from the property while still getting a partial contribution deduction.

If you charge a contribution to a credit card, it is deductible in the year charged, not when payment is made.

If you deduct state and local taxes, miscellaneous deductions (such as employee business expenses), claim multiple dependents or recognize a large capital gain, you could be subject to the alternative minimum tax. It is a tax over and above your "regular" tax.

There is another one year patch to the AMT that increases the exemption amounts to $70,950 for married taxpayers and $46, 700 for single taxpayers to help to insulate middle-income taxpayers from this tax. In addition, nonrefundable personal credits such as dependent care credit, education tax credits, adoption credit, child tax credit, retirement saver’s credit, residential energy property credit and residential energy-efficient improvements credit can be utilized to offset the AMT liability.

Taxpayers are allowed to exclude from income (tax free) up to $2 million of forgiven qualified principal residence mortgage debt through 2012, including debt that has been reduced through a restructuring or mortgage workout. If you exclude the canceled debt from income and you continue to own the residence, you must reduce the basis of the residence. This will increase any gain on sale (or could change a loss into a gain). The gain may be eliminated by the home sale exclusion.

If your employer provides group disability insurance, you should check with your employer to determine what benefits you are entitled to if you were to become disabled. For example, how much are you covered for, is there a monthly maximum that you will receive, what determines if you are disabled and whether the payments you receive are taxable. Consider getting your own policy. Among other possible benefits, any payments you receive could be tax-free.

To avoid underpayment penalties, you must pay estimated tax in four equal installments (or as withholding taxes) equal to 90% of your 2009 income tax liability, or 100% of your total tax for 2008, whichever is lower. If your 2008 AGI was over $150,000 ($75,000 if married filing separately), you must pay in 110% of your total tax for 2008 or 90% of your 2009 tax, whichever is lower. You won’t owe an estimated tax if the tax shown on your 2009 return (after withholding) is less than $1,000. A tax projection can help you evaluate whether your withholding or estimated tax should be increased or decreased. Ask us about doing one for you.

- BUSINESSES -

Set Up a Retirement Plan Before Year-End

A business can set up a retirement plan and take a 2009 tax deduction for contributions paid before the filing deadline of your 2009 tax return (as long as the plan was in existence no later than December 31, 2009 and no later than October 1, 2009 for a SIMPLE IRA). A different kind of plan (a SEP-IRA) can be set up and funded as late as the due date of your return (including extensions). Total contributions to all qualified retirement plans (including Keogh plans if you are self-employed) cannot exceed certain limits based on income levels. When you start a plan, you may be entitled to a credit of 50% of your administrative costs (up to $500 per year for 3 years).

Self-employed individuals who have no employees (other than their spouse) have a pension plan option (a "single-participant" 401(k)) that allows the owner to contribute up to $49,000 per year ($54,500 if over age 50) into the plan. Contributions can also be made for a spouse who is a paid employee. These contributions reduce your income tax but not your self-employment tax (or your spouse's social security and Medicare tax, if any). If you hire additional employees, the plan must be up-graded to a full blown 401(k) that covers the additional employees. Limitations may apply if you are a participant in another pension plan.

Manufacturing Deduction

Some businesses are allowed an extra deduction just because they are in a domestic manufacturing or production activity in the U.S. The deduction equals 6% of the smaller of qualified activities income or taxable income. The percentage rises to 9% in 2010 and thereafter. The deduction cannot exceed 50% of the W-2 wages allocable specifically to the activity.

Delay Billing Customers Until After Year-End

If you expect to be in a lower tax bracket in 2010 (versus 2009), it may pay to defer income into 2010 from 2009. This only works if you use the cash method of accounting for your business. Make sure that this will not significantly increase the risk of not getting paid. If you use the accrual method of accounting, you must delay the shipment of goods in order to shift income.

Employ Your Children Before Year-End

If you are subject to self-employment tax (15.3% on up to $106,800 of earned income in 2009 plus 2.9% on income over $106,800), you may want to hire your child to work in your business - if it is a sole proprietorship. First, your child’s wages are fully deductible as a business expense. Second, children under age 18 who are employed in a parent's business are not subject to Social Security tax on their wages - and neither is their parent/employer. However, payroll tax returns and W-2’s would still have to be filed. A child with earned income receives a standard deduction of up to $5,700 for 2009 and qualifies for an IRA deduction of $5,000, totaling up to $10,700 of income free from federal income tax.

Business Contributions

If you find yourself with excess inventory, you may consider contributing some to charity. Under certain conditions, you may deduct not only the cost of the goods, but half of the lost profit as well (not to exceed twice the cost) (subject to other limitations).

Depreciation

Section 179 expensing amounts were increased to $250,000 in 2008 and are now extended through 2009. Hence, if you own a business, have net business income and buy less than $800,000 of equipment, you can expense up to $250,000 of the cost instead of depreciating the equipment over several years. Automobiles and real property do not qualify for this election.

Trucks and vans do qualify for section 179 expensing if they have a gross vehicle weight of more than 6,000 pounds. For SUVs that have a gross vehicle weight of 14,000 pounds or less, the expense is capped at $25,000.

For self-employed taxpayers, a last-minute purchase may save self-employment tax and increase the amount of AGI related deductions (medical expenses and miscellaneous itemized deductions).

B) 50% First-year Bonus Depreciation Returns

For 2008, purchases of qualified property with a depreciation period of 20 years or less (which includes qualified leasehold improvement property) will be eligible for additional 50% bonus depreciation in the first year. In addition, for new vehicles purchased in 2008, an additional first-year depreciation deduction of $8,000 will be allowed. Thus the first-year limitation on regular depreciation for new "luxury" business automobiles for 2008 is $10,960 ($8,000 + $2,960) and $11,160 ($8,000+$3,160) for "light" trucks and vans.

C) 15 Year Depreciation for Qualified Leasehold Improvements to Expire in 2009

Expiring after 2009, qualified leasehold improvements to nonresidential property and qualified restaurant property placed in service in 2009 can be depreciated over 15 years instead of over 39 years. 15-year property now includes qualified retail improvements. Property placed in service in 2009 will also be eligible for 50% bonus depreciation.

If your business owns real property, consider a cost segregation study to maximize your depreciation deduction. You can accelerate depreciation by properly identifying and pricing nonstructural items and land improvements separately from the building. This can be done on newly acquired property as well as on property acquired in previous years.

Energy Efficient Commercial Property Deduction

Extended through 2013, an immediate deduction (instead of depreciation) of up to $1.80 per square foot may be allowed for qualified energy-saving improvements such as interior lighting systems, HVAC, hot water systems and building envelopes. To qualify, the improvements must meet certain requirements which include meeting a 50% reduced energy consumption standard.

Energy Efficient New Home Construction Credit

Contractors may be eligible for a $2,000 credit per home for homes certified to have an annual heating and cooling energy consumption that is at least 50% less than a comparable home and meet certain other requirements.

Employer-owned Life Insurance

Proceeds from employer-owned life insurance may be taxable income if notice and consent requirements are not met. Employers who purchase life insurance policies on their employees in which their business is a beneficiary are subject to the new rules. The employee must be notified in writing and agree to be insured before the policy is issued. In addition, an annual return must be filed. Please consult with your insurance advisor.

Review Your Business

Before the end of the year, consider accelerating any routine plant and equipment maintenance that is scheduled for early 2010. Take a look at your office and general supplies and consider restocking before year-end if they are running low. If you have business travel or meetings scheduled in early 2010, for which the dates are flexible, you might want to push one or more events to 2009 to accelerate the deduction. If you are on the cash method of accounting for your business, you must pay for (or charge to a credit card) the expenses in 2009 to get a deduction. Pre-paying an expense does not accelerate a deduction.

- OTHER PLANNING IDEAS AND CONSIDERATIONS - 

Gifts

If you are concerned about the federal estate tax or simply want to transfer money or securities to children or others, you should consider taking advantage of the $13,000 annual gift tax exclusion by making gifts before the end of 2009. Gifts have the added attraction of removing income from the donor's tax returns in future years. Married couples can make joint gifts of up to $26,000 per donee, per year without paying any gift tax. These gifts will not reduce the unified estate tax exemption (which is $3,500,000). Make sure the check, or stock transfer, clears the bank, etc. in 2009 to avoid any questions. Note, in addition to the annual exclusion, you can make direct payments to schools (tuition only) and doctors and hospitals. These types of gifts do not count toward the annual exclusion. Additionally, the top estate and gift tax rate is 45% for 2009.

Estate Planning

With the continuous tax law changes, it may be advisable to have us look over your wills to assure that any necessary changes are made in order to avoid any unexpected outcomes. Estate planning is also more than having wills and reducing (or eliminating) your estate tax. It is about making sure that your heirs receive what you want them to ... at the lowest possible tax cost. Ask us about life insurance trusts, generation skipping trusts and how changing the beneficiaries of your retirement and IRA plans can increase what you leave to your loved ones.

Asset Protection

Ask us about protecting your assets from creditors through spousal transfers, life insurance and annuities, family limited partnerships, retirement plans and IRA's.

Other

· Installment sales. Defer the gain on sales of certain assets until you collect the installment payments. Remember that long-term capital gains tax rates are not scheduled to increase until January 1, 2011.
· Like-kind exchanges. Defer some or all of the gain on swaps (trades) of certain assets. Use this method instead of selling property and then replacing it.
· Cafeteria Plans. If available to you, take advantage of cafeteria plans as certain expenses can be paid on a pre-tax basis avoiding income taxes as well as Social Security and Medicare taxes.
· Home office expenses. The rules for qualifying for these deductions have been liberalized but are still quite strict.

Through careful planning, your 2009 tax liability can be reduced and your financial position improved. The ideas discussed in this letter are a good way to get you started with year-end planning. Please don’t hesitate to call us with questions or additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can.

Just a reminder, our affiliate, Client Financial Services, Inc., can help you with all of your investment and insurance needs, such as health, disability, property and casualty as well as long-term care insurance. Client Financial Services, Inc. can help you with your 2009 IRA and pension contributions, as well as all of your investment planning needs. Please call for an appointment with us and our advisors - there is no charge to you.

This newsletter offers general tax, financial and business suggestions. Because of the complexities of the laws, the constant changes resulting from new developments and the necessity of determining whether the material discussed is appropriate to a particular individual or business, it is important that you call us before implementing any of the suggestions mentioned.

Unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties.

Thank you for being our clients and sending us your referrals.

Best regards,

ARTHUR T. TENENBAUM & COMPANY