With our complicated and ever-changing tax laws, you can't afford to ignore tax planning. The strategies discussed here may help you pay less in taxes. We'd be happy to assist you.

Capital Losses Save taxes by shifting income Explore education tax incentives Tax-deferred retirement savings plan Traditional/ Roth IRA's and their benefits Make the most of deductions

Claim deductions and credits Self employed health insurance deductions Establish a retirement plan Tax Credits What's New in 2009 and 2010 2010 Tax Law Stimulus

This Publication is intended to provide general information to our clients and friends. It does not constitute legal advice, nor is it intended to convey a thorough treatment of the subject matter. Every person's situation is unique please talk with us.

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Capital Losses

You can deduct capital losses to the extent of any realized capital gain on a dollar-for-dollar basis. Once you've offset all your capital gains, you can deduct capital losses against other taxable income up to a total of $3,000 per year ($1,500 for a married person filing separately). Any unused capital losses are carried forward for deduction in later tax years subject to the same limits.
 

To the extent possible, time investment gains and losses to avoid large capital loss carryovers that will take several years to deduct.

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Save taxes by shifting income

You may give up to $13,000 (as adjusted for inflation) of cash or other property to each of any number of individuals annually without federal gift tax. Married couples that agree to "split" their gifts can give $26,000 per recipient annually.

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Explore education tax incentives

We all know that financing an education can be expensive. You'll want to consider all available tax incentives to help defray some of the cost.

Section 529 Plans - A prepaid tuition plan or college savings account described in Section 529 of the tax code is one possibility. While contributions to a Section 529 plan are not deductible on your federal return, benefits or distributions used for qualified higher education expenses are generally tax-free. The tax-free feature makes investing in a 529 plan attractive compared to investing in a comparable taxable account. There may be a state tax benefit in some states as well. Connecticut has enacted a state tax benefit.

There are tax benefits for college education expenses in 2009 and 2010

	The Tuition and Fees Deduction
	The American Opportunity Credit
	The Lifetime Learning Credit

The Tuition and Fees Deduction reduces taxable income

The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying education expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. The tax credit is scheduled to have a limited life span. It will be available for the years 2009 and 2010, unless Congress decides to extend the credit to other years.

The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution. You need not be enrolled at least half-time; even if you took only one class, you may take advantage of the Lifetime Learning Credit.

Credits may be limited or phased out based on income. Also no education tax break is allowed for taxpayers who are married but filing separately.

Let us work with you on the particulars of your individual situation regarding these credits.

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Tax-deferred retirement savings plan

An employer's 401(k) or other tax-deferred savings plan (e.g. a 403(b) or SIMPLE plan) may offer you a convenient way to save toward your retirement. You don't pay taxes immediately on the salary you defer to your plan account. Income taxes aren't due until you receive distributions from the plan. Your account's investment earnings — interest, dividends, and capital gains — also are tax deferred. With no taxes taken out, your savings have a chance to grow and compound much faster.

If you are eligible, contribute to your employer's tax-deferred savings plan - especially if your employer matches part of your contribution. You can reduce current incomes taxes while helping to provide the financial security you'll need during retirement. For example, Kris contributes $5,000 of her salary to her employer's 401(k) plan this year. Since she's in a 30% tax bracket, contributing to the  plan reduces her income taxes by $1,500. Any earnings on her 401(k) plan investments also are tax deferred.

	2009	2010
401(k) dollar limit	$16,500	$16,500
403(b) dollar limit	$16,500	$16,500
457 dollar limit	$16,500	$16,500
Catch-up limit	$5,500	$5,500
Defined benefit limit	$245,000	$245,000
Defined contribution limit	$55,000	$55,000
Compensation limit	$245,000	$245,000
Social Security withholding:
(OADI Wage Base)	$106,800	$106,800
(OASDI Rate)	6.20%	6.20%
(Medicare Wage Base)	Unlimited	Unlimited
(Medicare Rate)	1.45%	1.45%

The IRS doesn't allow you to avoid paying taxes on 401(k)s, traditional IRAs, or other tax-deferred plans forever. You'll generally have to withdraw minimum amounts — called "required minimum distributions" or RMDs each year after you reach age 70½. The IRS has simplified the rules for computing annual RMD amounts. Usually, you can compute your RMD using a uniform table based on your age. For tax year 2009 the IRS allowed taxpayers to forego their required minimum distributions, but RMD's must be taken in 2010.

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Traditional/Roth IRA's and their benefits

For 2009 and 2010, individuals who earn at least $5,000 in compensation may contribute up to $5,000 total to one or more IRAs. Married couples may contribute as much as $10,000 ($5,000 for each spouse), even if one spouse does not work, as long as the joint compensation is at least as much as the contributed amount. An additional $1000 catch-up contribution is allowed to individuals who have reached age 50.

Traditional IRAs - Contributions to traditional (non-Roth) IRAs may be tax deductible. You may deduct your entire allowable contribution — no matter how high your income is — if neither you nor your spouse is eligible to participate in an employer-sponsored retirement plan. When one or both spouses are eligible for plan participation, deductions for contributions to traditional IRAs may be limited or eliminated when AGI exceeds specific levels.

For 2009 the deduction phase out ranges for plan participants are: $55,000-$65,000 of AGI for single and head of household filers, $89,000-$109,000 for joint filers and $0-$10,000 for married filing separate returns.

The phase out range for a married person who is not a plan participant but who's spouse is a plan participant for 2009 and 2010 the phase out range is $166,000-$176,000.

Roth IRAs - A Roth IRA is a nondeductible IRA in which account earnings are potentially tax-free, rather than tax deferred. Tax-free distributions of Roth IRA earnings are available after a five-year waiting period when:

	The account owner is at least age 59½
	The money is used for first-time home buying expenses up to $10,000
	The account owner becomes disabled or dies
	Eligibility to contribute is phased out as AGI rises. For 2009 the limits increase to $105,000-$120,000 for single and head of household filers, $166,000-$176,000 for joint filers. There is no limit change for married filing separate.

Income limits do apply to Roth IRA contributions for 2010 but not to Roth IRA conversions done in 2010.

Modified AGI Limits for Roth IRA Contributions
	2010	2009
Joint Filers	$167,000-$177,00	$166,00-$176,00
Single Filers	$105,000-$120,000	$105,000-$120,000

For Roth IRA conversions in 2010, any amount required to be included in gross income due to the conversion can be included ratably over tax years 2011 and 2012, unless the taxpayer elects to pay the tax on the conversion in 2010.

If you have not contributed the maximum amount to your IRA for 2009, you still have until April 15, 2010 to do so.

Beneficiaries of IRAs - Beneficiaries of IRAs (or qualified plans) are well advised to get expert tax advice before taking action on their inheritance. This is particularly true for spousal beneficiaries who have more tax saving choices and more potential pitfalls than other beneficiaries.

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Make the most of deductions

If you are a K-12 teacher, principal, counselor, or aide, you can deduct up to $250 of your eligible out-of-pocket expenses for classroom materials and supplies in computing AGI. Thus, you don't need to itemize to claim the deduction. There is a 900-hour minimum work requirement and you should save your receipts.

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Claim deductions and credits

Reviewing deduction and credit opportunities may reveal ways to cut taxes on your business income. Following are a few strategies to consider:
 

As much as $250,000 of the cost eligible property placed in service in your business may be eligible for first-year expensing under Section 179 of the tax code.

Business Automobiles - If you use your personal automobile for business purposes you may deduct your expenses.

There are two basic ways to approach the deduction: (1) claim your actual expenses for the business-related portion of fuel, repairs, insurance, etc., or (2) calculate your deduction using the standard mileage rate. For 2009 the business standard mileage rate is 55.0¢ a mile and for 2010 the business standard milage rate is 50¢ a mile.

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Self employed health insurance deductions

After years of being limited to a partial deduction, individuals who are self employed may now deduct 100% of health insurance expenses paid for themselves and their families. Certain requirements apply.

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Establish a retirement plan

A corporation with significant profits that already pays its owner-employees well should consider starting a profit-sharing plan. Contributions to the plan would reduce corporate taxes and pass corporate income to participating employees (including the owners) on a tax-favored basis. A profit-sharing plan can have a 401(k) salary deferral feature if desired.

Retired Public Safety Officers. Distributions from a governmental plan to retired public safety officers are now excluded from the additional 10 percent tax if made after the recipient separated from service after reaching age 50. Other recipients must have attained age 55. Certain retired public safety officers can exclude distributions from a Section 457 plan that are used to purchase health insurance.

Charitable IRA Distributions. For 2009, IRA distributions of up to $100,00 made directly to a charity may be excludable from the IRA owner's gross income.

Insurance Premiums for Retired Public Safety Officers Excludable. Retired safety officers may elect to exclude from income distributions made directly from an eligible retirement plan to pay premiums for certain insurance up to a $3,000 limit

New substantiation requirements apply for cash contribution to charities.

If a husband and wife who file a joint return are the only members of a qualified joint venture, they can elect not to be treated as a partnership for federal tax purposes.

In 2009 and 2010, the "kiddie tax" applies to 18-year-olds and to full-time students over age 18 and under age 24, unless the child's earned income exceeds 1/2 of his or her total support. The tax rate applied to the child's unearned income over $1900 is the parents' highest rate.

On February 17th, 2009, President Obama signed "The American Recovery and Reinvestment Act of 2009" into law to help stimulate the economy out of recession. Here are some highlights:

Individual Provisions

• "Making Work Pay" Tax Credit will provide up to a $400 refundable tax credit for eligible single filers and $800 for eligible couples filing a joint tax return.
  The credit is 6.2% of earned income and phases out at AGI levels of $75,000 for singles or $150,000 for married filing jointly.
  Tax payers will not receive a check, this year's credit will be received through a reduction in employee withholding and self-employed required estimated tax payments.
  
  
• Changes made to the "First-time Homebuyer Credit" - The maximum credit amount is increased to $8,000 ($4,000 for married persons filing separately) and the credit is extended so that it applies to purchases made prior to April 30, 2010.
  
  
• Taxpayers who have owned and lived in their old house for any five consecutive years within the preceding eight years will be treated for purposes of the credit as First-time homebuyers eligible for a maximum $6,500 credit. For this credit, the purchase prices of the home must be $800,000 or less.
  
  
• The 2009 Act allows an income-tax deduction for state and local sales and excise taxes paid on the purchase of qualified motor vehicles on or after the 2009 Act's enactment date and before 2010. The deduction is taken toward AGI and phases out at AGI levels of $125,000 for single filers and $250,000 for married filing jointly.
  
  
• Alternative Minimum Tax Relief is extended for 2009. The tax law stimulus increases the AMT exemptions for 2009 to $46,700 for individuals and $70,950 for joint filers
  
  
• The American Opportunity Education Tax Credit replaces and improves upon the HOPE scholarship credit. The credit will be allowed for four years of undergraduate education.
  
  
• COBRA Premium Assistance for the Unemployed - The federal government will subsidize 65% of COBRA premiums for employees who are involuntary terminated after September 1, 2008 $2,400 of unemployment compensation is excluded from gross income in 2009.
  
  
• The American Recovery and Reinvestment Act of 2009 provides energy incentives for individuals. The new law increases the energy tax credit for homeowners who make energy efficient improvements to their principal residence. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.
  
  The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy efficient heating and air conditioning systems.

Business Provisions:

• New Operating Losses (NOL) - The carryback period is extended for five years instead of two for small business.
  
  
• Fifty Percent Bonus Depreciation is extended for expenditures made in 2009 and for certain longer-lived assets in 2010.
  
  
• Small Business Expensing Rules are extended for assets purchased and placed in service 2009. The limit is $250,000 for assets and is phased out for businesses that purchase more than $800,000 in assets.
  

There are many other business economic stimulus changes that may be specific to your small business.

The provisions of the new law described here are intended to stimulate the economy through individual and business tax breaks. It is important to consider your tax and financial situation now and determine how the 2009 Act will affect you. We can help you with your planning. Let our professionals be of service to you.