TABLE OF CONTENTS
(Select CTRL and Click to jump to a particular topic)
American Recovery and Reinvestment Act of 2009
FSA (Flexible Spending Account)
Stocks and Equity Investments
Income and Deduction Planning
Itemized Deductions
Withholding Tax / Underpayment Penalties
Sales Tax Deduction
AMT (Alternative Minimum Tax)
Tax Credits for Energy Saving Improvements
Retirement Planning for Business Owners
Tax Credit on Home Purchase
Home Sale/Exclusion of Gain
Gift Tax Exclusion
IRA Planning - Required Minimum Distributions (RMDs)
Deducting S Corporation Losses
Self-Employed Health Insurance Premiums
Section 179 Depreciation / Bonus Depreciation
Maximize Your Retirement Plans for 2009
Education Credits and Deductions
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Year-end tax planning
Dear Client:
This has been a tumultuous year. Both individuals and businesses have
grappled with recent economic downturn and a changing tax landscape.
Following the Emergency Economic Stabilization Act of 2008—Congress
passed new economic stimulus law earlier this year.
The American Recovery and Reinvestment Act of 2009 authorizes new tax
breaks for certain homebuyers and purchasers of vehicles, preserves bigger
write-offs for acquiring business assets and enhances higher education
credits—just to name a few of the key provisions. Keeping all this in mind, we
have prepared the following 2009 Year-End Tax-Planning Letter.
We have compiled a checklist of actions based on current tax rules that may
help you save tax dollars if you act before year-end. Not all actions will apply
in your particular situation, but you will likely benefit from many of them. We
can narrow down the specific actions that you can take once we meet with you
to tailor a particular plan.
In the meantime, please review the following list of topics provided as
they may apply to your particular circumstances. We recommend you do
not make any major tax decisions without first seeking professional
advice.

FSA (Flexible Spending Account): Increase the amount you set
aside for next year in your employer's health flexible spending account
(FSA) if you set aside too little for this year. If your plan allows, don't
forget you can set aside amounts to get tax-free reimbursements for
over-the-counter drugs, such as aspirin and antacids.

Stocks and Equity Investments - Maximize Deductible Losses: If
you do not have a capital loss carry-forward from 2008, you may want
to realize losses on stock prior to December 31 in order to take
advantage of the $3,000 capital loss limitation ($1,500 married filing
separate). Even if you want to keep the loss stock, you can realize the
loss by selling by December 31st. However, to avoid wash sale rules
you must wait at least 31 days prior to buying the stock back. It may be
advisable for us to meet to discuss year-end trades you should
consider making.

Stocks and Equity Investments - 0% Long Term Capital Gain Rate
for Lower Bracket Taxpayers: Taxpayers in 10% and 15% tax
brackets can realize zero capital gains taxes through the end of 2010.
To qualify for zero capital gains rate, a married couple could have no
more than $67,900 in taxable income (taxable income includes the
capital gain); single filers earning $33,950 or less will pay no tax on the
sales of assets they've owned for more than a year. While lowerincome individuals aren't typical investors, this tax benefit could help
out taxpayers such as retirees who have little or no taxable income.
And the children of older individuals could combine the annual gift
exclusion ($13,000 in 2009) with this capital gains break and give
appreciated long-term assets to their older parents. Gifts of capital gain
property to children prior to the sale will most likely not allow for the 0%
rate as children will generally pay taxes at their parent's rate.

Income/Deduction Planning - Accelerate Income?: If your 2009
income has been reduced or adversely impacted due to current
economic conditions (e.g. employment or business net operating
losses), it could be beneficial to actually accelerate income in 2009
when possible to take advantage of the fact that you are in a lower tax
bracket than normal.

Income/Deduction Planning - Defer Income?: In some cases,
individuals have not been adversely impacted by current economics
conditions and have maintained income levels consistent with prior tax
years. In these circumstances, it may be beneficial to postpone income
until 2010 and accelerate deductions into 2009 to lower your 2009 tax
bill. This strategy may enable you to claim larger deductions, credits,
and other tax breaks for 2009 that are phased out over varying levels
of adjusted gross income (AGI). These include IRA and Roth IRA
contributions, conversions of regular IRAs to Roth IRAs, child credits,
higher education tax credits, the above-the-line deduction for highereducation expenses, and deductions for student loan interest.
Postponing income also is desirable for those taxpayers who anticipate
being in a lower tax bracket next year due to changed financial
circumstances.

Itemized Deductions - Accelerate into 2009?: Unless you believe
you will be in a higher tax bracket in 2010 it is generally beneficial to
accelerate itemized deductions by paying for the expense by year-end.
For convenience purposes you can also pay by charge card. Therefore
you should consider making all charitable contributions, cash and noncash, and other itemized deductions by 12/31. If you feel that you will
owe state taxes on your 2009 tax return you may want to consider
"pre-paying" the taxes prior to 12/31. Please note however it is
generally not advisable to pre-pay taxes if you will be subject to
Alternative Minimum Tax. If you want to pre-pay the tax we
suggest you contact us so that we can consider your AMT
exposure.

Withholding Tax - Avoiding an Underpayment Penalty: If you think
you have underpaid your taxes for 2009, you may be facing a penalty
for underpayment of estimated taxes. You may be able to eliminate or
reduce penalty by increasing your withholding prior to year-end. In fact,
if you withhold taxes by December 31st, the withholding is treated as if
it was withheld ratably throughout the year. Therefore a large
withholding on your final paycheck of the year can reduce or eliminate
penalty from all four quarters. If you need to know how much to
withhold in order to avoid penalty, please contact our office.

Sales Tax Deduction - Purchase of an Automobile: If you are
planning to buy a car, do so before year-end in order to nail down a
deduction for state sales tax and excise tax on the purchase. The
American Recovery and Reinvestment Act permits taxpayers to take a
deduction for state and local sales and excise taxes paid on the
purchase of new cars, light trucks, motor homes and motorcycles. The
deduction is available on new vehicles purchased from Feb. 17,
2009, through Dec. 31, 2009. In states that don't have a sales tax, the
law provides a deduction for other taxes or fees paid. This deduction is
available whether or not a taxpayer itemizes deductions on Schedule
A. The deduction is limited to the taxes and fees paid on up to $49,500
of the purchase price of an eligible vehicle. The deduction is
reduced for joint filers with modified adjusted gross incomes (MAGI)
between $250,000 and $260,000 and other taxpayers with MAGI
between $125,000 and $135,000. Taxpayers with higher incomes do
not qualify.

AMT (Alternative Minimum Tax): Estimate the effect of any year-end
planning moves on the alternative minimum tax (AMT) for 2009,
keeping in mind that many tax breaks allowed for purposes of
calculating regular taxes are disallowed for AMT purposes. This
includes the deduction for state property taxes on your residence, state
income taxes (or state sales tax if you elect this deduction option),
miscellaneous itemized deductions, and personal exemption
deductions. Therefore if you are subject to AMT in 2009 you may not
get any tax benefit by paying the deductions listed above by Dec 31st.
As a result, in some cases, deductions should be deferred rather than
accelerated to keep them from being lost because of the AMT.

Tax Credits for Energy Saving Improvements: The credits for
energy saving improvements have been reinstated for 2009 and 2010.
You can qualify for tax credits by making energy saving improvements
to your home, such as putting in extra insulation or installing energy
saving windows. Additional tax credits are available for installing
energy generating equipment (such as solar electric panels or solar
hot water heaters). For more information on what type of
improvements qualify go to http://www.energystar.gov/

Retirement Planning - Business Owners: If you are self-employed
and do not have a retirement plan, you still have time to setup an
account. With the exception of a SEP, most plans must be setup by
Dec. 31st in order to qualify for 2009 deferrals. If you would like to
discuss the best plan for your business, please call our office.

Home Purchase/Tax Credit: Recent legislation has extended the first
time home purchase credit to April 30, 2010. Credit for buying a home
before April 30th (or June 30th for contracts written by April 30, 2009)
equals 10% of purchase price or $8,000, whichever is less.
Additionally, taxpayers could continue to treat a purchase as made in
the prior year (e.g. take a credit on your 2009 return for purchases
made in 2010). A reduced credit of $6,500 would also be available to
taxpayers who have owned and used the same home as a principle
residence for any 5-consecutive year period during the 8-year period
ending on the date of purchase of a new residence. For purchases
after November 6, 2009, the homebuyer credit would be available on
homes costing $800,000 or less. In addition, the homebuyer credit will
begin phase out when taxpayer adjusted gross income reaches
$125,000 for single filers and $245,000 for joint filers.

Home Sale/Exclusion of Gain: Starting in 2009, the exclusion of gain
from the sale of a principal residence ($500,000 for joint and $250,000
for a single return) will not apply for periods that the home was not
used as a principal residence. This rule applies if you convert a
vacation home or rental property into your personal residence after
2008. In order to qualify for exclusion of gain, taxpayers must meet
ownership and use tests, or fall under one of the exceptions, and not
used the exclusion on sale of another home within two years of the
current sale. Exclusion rules continue to require owning the home 2 of
the 5 years preceding the sale along with calculation of qualified and
non-qualified principle residence use. Therefore, if you plan to sell
your second home in the next two years and hope to use the
principal residence exclusion, you should contact our office so
that you can plan your rental and personal use accordingly.

Gift Tax Exclusion: You can save gift and estate taxes by making
gifts sheltered by the annual gift tax exclusion before the end of the
year. You can give up to $13,000 ($26,000 if you "split gifts" with a
spouse) in 2009 to an unlimited number of individuals but you can't
carry over unused exclusions from one year to the next.

IRA Planning - Required Minimum Distributions: Required
Minimum Distributions (RMD) waived for 2009. IRA owners and their
beneficiaries do not have to take RMD’s for 2009. Taxpayers who can
take advantage of this change will not be forced to sell stock or mutual
fund shares held in retirement accounts when their value might be
severely depressed. However, if you think you will be in a lower tax
bracket in 2009 than in future years, you may want to go ahead and
take the distribution.

S Corporation Losses - Can You Deduct Them?: If you have 2009
business losses in an S Corporation, you may not be able to deduct
the losses unless you have personally funded them. If losses are
funded by a business bank loan or credit cards, you may not have
enough "basis" to deduct the loss. This can often be resolved by
loaning money to the corporation by December 31st or restructuring
loans. If you are concerned that you may not be able to deduct
your S Corporation losses, please contact our office for basis
planning.

Self-Employed Health Insurance Premiums- Deductible If
Reported Correctly: Individuals who are self-employed can deduct
their health insurance premiums “above the line”, thus avoiding the 7.5
% of AGI reduction that applies to medical expenses taken as itemized
deductions. A shareholder-employee of a Subchapter S corporation
may also be able to take the deduction for self-employed health
insurance premiums. However, according to IRS policy, the following
must occur in order to secure the deduction for a S-Corporation owner:
o
The premiums must be paid by the corporation or reimbursed
to the shareholder-employee before the end of year.
o
The amount of health insurance premiums paid for the
shareholder must be included on their W-2.
o
Due to the above, if you are a S-Corporation owner, we
advise you to contact us or your payroll provider to ensure
that the health insurance is properly recorded on your W-2.

Business Asset Purchases - Section 179 Depreciation: Businesses
should consider making expenditures that qualify for the up to
$250,000 business property expensing option for assets bought and
placed in service this year. The maximum expensing amount may drop
to $134,000 for assets bought and placed in 2010 (higher expensing
amounts apply to certain specialized assets). Please note that
Section 179 expense cannot create or increase a loss, therefore if
your business is not profitable in 2009, you will not receive an
immediate benefit from section 179 expense, however please see
bonus depreciation below which can increase a loss. Please also
note that section 179 on vehicles is limited based on the type and
weight of the vehicle. If you plan to purchase a business vehicle
prior to 12/31 in order to receive a large 2009 deduction please
call our office to make sure the vehicle is eligible for the up to
$25,000 or higher section 179 deduction.

Business Asset Purchases - Bonus Depreciation: Businesses also
should consider making expenditures that qualify for 50% bonus first
year depreciation if bought and placed in service in 2009. The original
use of the property must begin with the taxpayer, so purchases of
used property will not qualify for bonus depreciation. North
Carolina does not allow the 50% bonus depreciation. For NC
purposes, only 15% of bonus depreciation is deducted in the current
year; the balance is allowed deduction with carry forward over 5 years.
Note, unlike section 179 expense, bonus depreciation can create or
increase a loss, therefore additional equipment purchases by 12/31/09
could possibly benefit a business running at a loss. This bonus writeoff generally will not be available next year. Property that qualifies for
Code Section 168 bonus depreciation includes most tangible property
such as equipment, furniture, computers and vehicles. Real estate
other than certain "qualified leasehold improvements" generally does
not qualify for bonus depreciation.

Maximize Your Retirement Plans for 2009: If cash flow is sufficient,
it is always advisable to fully fund your retirement. If you have not
maximized your retirement contributions, below are the contribution
limits for 2009.
Type of Plan
Contribution Limit
Additional Catch-up
for Age 50 and Older
IRA
SIMPLE
401(k)
SEP IRA
$ 5,000
$ 11,500
$ 16,500
$ 49,000
$ 1,000
$ 2,500
$ 5,500
---
Note: To receive a 2009 deduction IRA contributions must be made by
04/15/10. For employees, 401(k) and SIMPLE plan salary deferrals
must be made by December 31, 2009 (employers have until the due
date of their return, including extensions to make employer contributions to
the plan). SEP IRA contributions do not have to be made until the
extended due date of your 2009 return.

Education Credits/Deductions: The American Opportunity Tax
Education Credit temporarily increases the existing HOPE education
credit (for 2009 and 2010 only) from a maximum of $1,800 to $2,500
(i.e. 100% percent of the first $2,000 and 25 percent of the next
$2,000) per year while extending it to all four years of college and
adding course materials to qualifying expenses. More importantly, the
phase-out range is increased to $80,000-$90,000 ($160,000-$180,000
for joint filers). If you have not already "maxed out" this credit for 2009
you should consider paying qualified education expenses prior to
12/31 in order to receive full benefit of the credit.
You can also deduct on your NC return up to $5,000 (joint) and
$ 2,500 (single) for contributions to the NC sponsored Section 529
Plan (There are no income limits on the state 529 deduction).
(Contributions to 529 plans sponsored by other states will not qualify
for the NC deduction).
These are just some of the year-end steps that can be taken to implement
your tax planning strategy. Again, by contacting us, we can tailor a particular
plan that will work best for your individual circumstances.
U.S TREASURY DEPARTMENT CIRCULAR 230 DISCLOSURE: Pursuant to the rules of
professional conduct set forth in Circular 230, we inform you that any U.S. tax advice contained in this
communication (or in any attachment) is not intended or written to be used, and cannot be used, for the
purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed in this communication (or in any
attachment).