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TAX LAW CHANGES FOR 2009 WILL BENEFIT YOU
Expected Future Tax Increase:
Due to proposed legislation, it is likely that tax rates may increase in 2010 for ordinary income and capital gains and possibly for S corporation dividends as well.

Charitable Contributions:
Remember, you MUST have a cancelled check, a credit card statement, or a receipt for ALL cash donations. Do you visit other churches and make cash contributions? You need to write a check or obtain a receipt from the church. Otherwise, in the event of an audit, the cash contribution deductions will be denied.

Non-cash contributions of used clothing and household items must be in good condition. You will need a receipt in order to claim the deduction. If the total value of any type of non-cash donation is over $5,000, you need an appraisal.

Business Depreciation:
The IRS Sec. 179 fast write-off of the cost of new and used equipment has remained at $250,000 for 2009. However, for Minnesota the expense limit is $25,000 with 80% of the difference added back in the current year. 20% of this add-back will be subtracted in the succeeding five years.

For 2010, this deduction will revert from $250,000 to the 2007 limit of $134,000.

Residential Energy Credit Changes:
These credits are back for 2009 with increased credit rates and limits. Please let us know if you have made any energy saving home improvements during the year that may qualify for these credits such as windows, exterior doors, furnace or geothermal heat pump, A/C unit, water heater or insulation. The IRS indicates that taxpayers may rely on the certification of the property from the manufacturer.

Residential Gain Exclusion:
Beginning in 2009 you are no longer able to exclude the full amount of the gain on the sale of your vacation home which you converted to your personal residence after December 31, 2008, even if you meet the two out of five year holding period.

If your spouse dies, you can still exclude $500,000 of gain, if you both lived in your principal residence two of the five years prior to your spouse’s death.

2008 First-Time Homebuyer Credit:
Congress has extended and expanded the first-time homebuyer credit. Eligible taxpayers must buy or enter into a binding contract to buy a principal residence before April 30, 2010 and close on the home by June 30, 2010. The refundable credit of $8,000 is for new home buyers for homes purchased by 6/30/09. This credit does not need to be repaid unless the home ceases to be your main residence within a three-year period following the purchase.

The expanded credit allows a credit of up to $6,500 for long-time homeowners who buy a replacement principal residence. You must have lived in the same principal residence for any five consecutive year period during the eight-year period that ended on the date when the replacement home was purchased. This applies to homes that have their closing by 6/30/10.

The credit phases out for income between $125,000 and $145,000 for single filers and $225,000 and $245,000 for joint filers.

The credit is not available for homes priced at over $800,000, for taxpayers under 18 years of age or for taxpayers who can be claimed as a dependent on someone else’s return. A settlement statement must be attached to the tax return.

Deductible Mileage Rates:
The business mileage rate for 2009 is 55⊄ per mile. The 2009 medical and moving rate is 24⊄ per mile. Charitable mileage rate for both 2009 and 2010 is 14⊄ per mile. For 2010, the business mileage rate is 50⊄ per mile and medical and moving is 16.5⊄. As always, please be sure you keep a log for your business, medical, moving and charitable mileage use.

Alternative Motor Vehicle Credit:
This credit varies depending on the type of vehicle. The specific credit for a new (not used) car purchased in 2009 through 2010 will be determined by the auto manufacturer and the IRS. Your dealer will have credit details for specific makes and models.

Kiddie Tax:
There is a kiddie tax on unearned income such as interest, dividends and capital gains, if a child is under 19 years old or is a full time student up to 23 years of age. A child can earn up to $1,900 of unearned income and pay relatively low tax. However, after $1,900, they will be taxed at their parent’s tax rate. In 2009, most full-time students between the ages of 18 and 23 who have investment income over $1,900 will be exposed to this kiddie tax unless the student can prove they provide over half of their own support. If you are a business owner and pay your child a wage, it may eliminate the potential for kiddie tax by increasing their earnings. Please call us to discuss this option if you think it may apply to you.

The expansion of the kiddie tax provisions will require the tax return coordination of the child’s return with the parent’s return. If there is a possibility that your child’s unearned income will be over $1,900, both of your tax returns will need to be prepared together. You need to be aware that certain income information from your tax return will be included in the tax return of your child.

When to Start Collecting Social Security Benefits?
If you are considering beginning to collect social security in the next year, please call us to discuss your options. It may be advantageous to wait longer than you planned.

Sales Tax:
Did you purchase a new vehicle between February 17, 2009 and December 31, 2009? If so, you may be able to claim a deduction for the sales tax paid on the first $49,500 of the purchase price. In order to be eligible, you must be the original user of the vehicle; it must be a passenger auto or light truck with a GVW rating of $8,500 pounds or less, a motorcycle or a motor home. The deduction phases out for income between $125,000 to $135,000 for single filers and $250,000 and $260,000 for joint filers.

Pension Contribution Limits:
Most retirement plans have been amended to allow for catch-up contributions for those 50 and over. Check with your plan sponsor to see if you are able to utilize this increased deduction.

RETIREMENT PLAN (under age 70½)	2009	2010
IRA* (under age 50)	$5,000	$5,000
IRA* (over age 49)	$6,000	$6,000
Roth** IRA* (under age 50)	$5,000	$5,000
Roth** IRA* (over age 49)	$6,000	$6,000
Maximum 401(K) deferral (under age 50)	$16,500	$16,500
Maximum 401(K) deferral (over age 49)	$20,000	$22,000
Maximum SIMPLE deferral (under age 50)	$11,500	$11,500
Maximum SIMPLE deferral (over age 49)	$14,000	$14,000
*A single dollar limit applies to the sum of your contributions to your Roth and regular IRAs. **Roth IRA contributions are never deductible.

Take advantage of the ROTH IRA:
Due to the economy, many taxpayers are finding themselves faced with lower than usual earnings again this year. This may be the perfect year to make ROTH IRA contributions or to convert a regular IRA to a ROTH IRA. Taxpayers who normally are ineligible to fund or convert to a ROTH IRA may find themselves within the income limitations this year.

For those taxpayers whose income is too high to make a ROTH IRA contribution, there is a great opportunity coming up for you! Starting in 2010, the income limits for taxpayers to convert IRAs to ROTH IRAs are being eliminated. You can roll over your non-deductible IRA’s in 2010. There will be no tax if you do not have any traditional IRA accounts. If you have both non-deductible and traditional IRA accounts, there will be tax implications. This is a perfect tax strategy for those who have little or no money in their IRAs but have money in the company-sponsored retirement accounts. You can make spousal contributions for your non-working spouse. If your spouse does not have any IRAs from former employers, then the tax to convert IRAs to ROTH IRAs would be zero.

ROTH IRA conversions can be particularly beneficial to taxpayers who are currently in a lower tax bracket and expect to be in a higher one when they make withdrawals. There are no “required minimum disbursements” requirements for ROTH IRAs so they may be a good idea for you if you don’t need the income during your lifetime and want to pass this on to your heirs tax-free.

For ROTH IRA conversions that occur during 2010, a taxpayer may report the income equally in 2011 and 2012 or elect to report it all in 2010.

O% Capital Gain Tax Rate for Certain Taxpayers:
The capital gains tax for taxpayers in the 15% tax bracket and below is 0% for 2009. This applies to long-term gains that would otherwise be taxed at an ordinary rate less than 25%. In other words, in 2009, married taxpayers filing jointly with total taxable income less than $67,900 will pay the 0% capital gains tax rate (single - $33,950). If you are holding on to stocks with a very low basis and are in the 15% bracket you could sell the stock for a gain this year and potentially pay no tax on it! Just be sure the proceeds from the sale don’t push you into a higher tax bracket. For income above the thresholds, the maximum capital gains tax rate remains at 15%. It is possible that this rate, along with the15% tax rate on qualified dividends, will increase to 20% for 2010. Please call if you would like to discuss this further.

Health Savings Accounts:
HSAs are gaining in popularity. In order to set up an HSA, you need to be covered under a high-deductible health insurance plan. The maximum contribution in 2009 for self coverage is $ 3,000 and for a family $5,950. You have until 4/15/10 to make this deposit. If you have attained 55 years of age by year end, you may make additional catch-up contributions of $1,000 for 2009.

American Opportunity Credit:
This credit replaces the Hope Credit for higher education costs. The maximum credit is $ 2,500 per student per year and is available for the first four years of a student’s post-secondary education. Eligible expenses include tuition, fees, course materials and books. The income phase-out for single taxpayers is $80,000 - $90,000 and for joint filers $160,000 - $180,000.

Expanded Tax-free 529 Plan Withdrawals:
If you have a 529 Plan for education expenses, tax free withdrawals may now be taken for the purchase of any computer technology or equipment or internet access and related services. These items must be used by the beneficiary of the Plan or the beneficiary’s family during the time the beneficiary is enrolled in a post-secondary educational institution.

Minnesota Political Contribution Refund:
There is a two-year moratorium of the political contribution refund for contributions made after June 30, 2009 through June 30, 2011. Therefore, if you made political contributions during the first six months of 2009, you can still obtain a refund.

Minnesota/Wisconsin Reciprocity:
Minnesota is ending its income reciprocity program with Wisconsin effective January 1, 2010 for returns due April 15, 2011. Your employer will be required to withhold state taxes in the state where you work, not where you live. As a result, Minnesota and Wisconsin residents who work across the border and meet filing requirements will have to file returns in both states beginning in 2010.

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