Vol. 25, Issue 36, November 4, 2009 – PDF version
Jose G. Peña, Texas AgriLife Extension Economist-Management
With less than two months left before the end of the year, it is time to identify tax benefits that could reduce the 2009 tax bill and assist to plan income taxes ahead for 2010. Generally speaking this year=s tax system will be similar to last year, except for minor tax benefits which are phasing in from provisions added by the Emergency Economic Stabilization Act of 2008 (which addressed emerging financial bailout measures) and major benefits added by the American Recovery and Reinvestment Act of 2009, passed by Congress in January 2009. In addition to providing about $787 billion in financial stimulus, the bill added some tax breaks for individuals, such as a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence (which may be extended into 2010) and for businesses, such as extending bonus depreciation into 2009.
One of the most significant changes affecting agriculture is a provision which allows farm equipment to be depreciated faster. New farm machinery and equipment put in use in ’09 can be written off over six years instead of eight years. This doesn’t cover grain bins, cotton ginning assets, temperature controlled storage facilities or land improvements such as fences. Related to this, the $250,000, 179 expensing option and the 50% first year bonus depreciation provision was extended into 2009, as will be discussed later.
Basic tax planning requires considering the income tax consequence, both this and next year or longer into the future. This means considering whether to accelerate into 2009 or defer into 2010, income or deductions. This simulation will assist you to evaluate the impact that this actions may have on Adjusted Gross Income (AGI) and your ability to maximize itemized deductions that are tied to AGI, such as IRA deductions, standard deductions, personal exemptions, transfers to ROTH IRA=s, etc. If, for example, you expect to be in a lower or at least no higher tax bracket next year, consider pulling some 2010 deductions into this year, e.g., charitable donations, early payment of property taxes, etc.
Another important item to identify early is your Atax bracket,@ i.e., the rate at which your last dollar of income is taxed. (See Table 1)
|Table 1: Tax Rates and Tax Brackets for 2009 and 2010|
|MARRIED COUPLES FILING JOINTLY||MOST SINGLE FILERS|
|Tax Rate||2009 Taxable Income||2010 Taxable Income1||2009 Taxable Income||2010 Taxable Income1|
|10%||Not over $16,700||Not over $16,750||Not over $8,350||Not over $8,375|
|35%||Over $372,950||Over $373,650||Over $186,475||Over $186,825|
|1Estimated amounts; these are estimated amounts. The official amounts have not yet been released.|
Standard Deduction Planning
The standard deductions increased slightly from 2008 and are scheduled to remain the same in 2011 at $11,400 for couples plus, another $1,100 for those 65 or older (Singles: $5,700; 7,100 if 65 or older). Household heads get $8,350 plus $1,400 if 65 or older.
If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But, simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of deductible expenses so that they are higher in one year and lower in the following year, e.g., pay property taxes every other year, advance or delay charitable donations, if in business, advance or delay billings, etc.
The Section 179 expensing option for depreciable property used in business, i.e., computers, office furniture, equipment, vehicles, or other tangible business property, was increased to $250,000 for 2008-2009 and will be reduced to $134,000 in 2010, unless Congress changes the rules. Phase-out of this benefit starts at $800,000 of equipment purchased, i.e., for every dollar spent on new equipment above $800,000, the 250,000 expensing amount is reduced by a like amount.
In addition, first-year bonus depreciation equal to 50% of the cost (reduced by the Section 179 deduction) of most new (not used) equipment and software acquired and placed in service by December 31 of this year may be claimed. The 50% first-year bonus depreciation break will expire at year-end unless Congress takes further action. This means an eligible business can often claim first-year write-offs for the entire cost of equipment.
The expensing option is capped at $25,000 for SUVs with loaded weights between 6,000 and 14,000 pound. Keep in mind that the additional 50% first year, bonus depreciation and the regular depreciation may also be claimed. Non-SUVs, such as heavy pick-ups and nine passengers or larger buses, are exempt from this limit.
NOTE: The Emergency Economic Stabilization Act of 2008 and the 2009 stimulus package contain many tax savings provisions for both business and individuals, too numerous to list here. This is just a short sample.
- The cost of energy efficiency improvements, such as energy efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans installed in a principal residence, may be entitled to a tax credit of 30% of the purchase price, up to a maximum credit of $1,500. This credit is not off-set by the alternative minimum tax (AMT) in 2009, but will be off-set by the AMT next year, unless Congress changes the rules.
- Sales tax paid on up to $49,500 paid for a new vehicle purchased in 2009 may be deducted. If the taxpayer does not itemize, the tax payer can add the sales tax on the new vehicle to the standard deduction.
- The additional $500 ($1,000 for joint filers) standard deduction for real property taxes for non-itemizers was extended through 2009.
- Teachers and other education professionals can deduct up to $250 above-the-line (not required to itemized), of certain out-of-pocket classroom expenses, including the cost of books, supplies, equipment, and software used in the classroom.
- IRA distributions for individuals age 70.5 years old and older are not required in 2009. Congress may not extend this relief for 2010.
- Tax-free IRA distributions of up to $100,000 made directly to charity are allowed through December 31, 2009. This waiver applies to IRAs and defined-contribution plans, including distributions from 401(k), 403(b), and state-sponsored 457(b) accounts and is available to everyone regardless of their total retirement account balances.
- The above-the-line deduction of higher education tuition and book expenses paid during the year for the taxpayer, a spouse, or a dependent was extended through December 31, 2009.
- The $1,000 child tax credit is available through 2010 and reverts to $500 in 2011.
- Self-employed individuals are allowed to claim the amount paid for self-employed health insurance premiums during the taxable year as an above the line deduction (up to the net income from the business the insurance plan is under).
- The alternative minimum tax (AMT) amount was increased to $70,950 and $46,700 for joint and single filers, respectively, for 2009 by the American Recovery and Reinvestment Act of 2009. The AMT can wreak havoc with year-end tax planning. While it is difficult to develop tax saving strategies around the AMT, tax payers should consider its potential implications as early as possible. The AMT will require tax payers to compute their income taxes under two systems, the regular tax system and the so-called alternative minimum tax (AMT) system and pay the higher of the two amounts. The AMT will have a greater impact on tax payers with incomes between $100,000 and $500,000 and/or tax payers who deduct a significant amount of state and local taxes (income, property, and/or sales taxes) or miscellaneous itemized deductions (like unreimbursed employee business expenses), or claim multiple dependents exemption.
Appreciation is expressed to Sherman Mumme, CPA, for his contribution and to review this article.