2009 Year-End Tax Planning

Here is a summary of proposed 2010 tax changes for individuals and small business owners: Making Work Pay Tax Credit: Currently, American workers are eligible for a refundable $400 tax credit for 2009 and 2010. The full credit is available for unmarried filers with income of $75,000 or less, and for married filers with income of $150,000 or less. A proposal exists to make this tax credit permanent. Earned Income Tax Credit: The EIC was changed for 2009 and 2010 to provide a higher tax credit for families with three or more children, and the credit is made available over a wider range of income levels. In 2008 and earlier, the earned income credit maxed out at two children and had narrower income ranges for married filers compared to unmarried filers. There is a proposal to make these changes permanent. Child Tax Credit: For 2009 and 2010, the child tax credit may be partially refundable (meaning that taxpayers could, potentially, receive a tax refund higher than the amount they paid in) based on a threshold amount of 15% of earned income in excess of $3,000. This $3,000 threshold will revert back to a threshold of $12,700 (indexed for inflation) in 2011. A proposal is to make the $3,000 threshold permanent, and the amount would not be indexed for inflation. Retirement Savings Credit: Currently, some taxpayers are eligible for a tax credit of up to $1,000 for saving money in a retirement plan such as a 401(k) or IRA. The tax credit is non-refundable (meaning once the person's tax liability is reduced to zero, any additional credits won't increase a person's refunds). A proposal exists to replace the $1,000 non-refundable credit with a refundable credit equal to 50% of retirement savings up to a maximum of $500. (The credit amounts would be indexed for inflation.) Additionally, the income range that qualifies for the credit would be expanded. Taxpayers could ask the IRS to deposit the portion of their refund that represents the Savings Credit directly into their retirement plan.

Individual Retirement Accounts:

Currently, taxpayers must set up and fund an Individual Retirement Account (IRA) themselves. A proposal exists that employers automatically enroll employees in an IRA and deduct 3% of an employee's pay to be deposited directly into the IRA, unless the employee decides to opt out of the IRA program or decides on a different funding amount. The administration would also provide guidance to employers for choosing default investment options for how the IRA funds are invested, and would provide employers with a tax credit of up to $250 for complying with the automatic IRA provisions. Employers that provide 401(k) or other group retirement plans would not have to provide automatic IRA enrollment.

American Opportunity Tax Credit: A proposal is in place to make the American Opportunity Tax Credit a permanent replacement for the Hope Credit. Currently, the American Opportunity credit is available for 2009 and 2010, and provides for a credit of up to $2,500, of which $1,000 could be refundable. The credit is available for tuition, books and course materials for the first four years of college education. Sales Tax Deduction: Currently, taxpayers can choose to deduct either state and local income taxes or state and local sales taxes as an itemized deduction. The sales tax deduction is scheduled to expire in 2009. A proposal is in place to extend the optional sales tax deduction to 2010. Currently there are six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. Those tax brackets were implemented in 2001 and are scheduled to expire at the end of 2010. A proposal exists to continue using the 10% through 28% tax rates and to replace the top two rates with 36% and 39.6% rates. How income is measured in determining the tax bracket would change. The 36% bracket would begin at $200,000 minus the standard deduction and one personal exemption for single filers, and at $250,000 minus the standard deduction and two personal exemptions for married filers. How tax rates are determined remains unchanged for the other tax brackets. The new tax rates would begin in 2011. Itemized Deductions: Itemized deductions are reduced for filers with adjusted gross income of $166,800 (for 2009) or higher. The amount of the reduction have been gradually minimized from 2006 to 2009, and in 2010 there will be no reduction in the amount of itemized deductions for higher-income filers. In 2011, the reduction amount is scheduled to revert back to a level 3% of AGI in excess of the AGI exceeding the certain threshold amount. A proposal exists to allow the law to revert back. Some deductions are not subject to reduction: medical expenses, investment interest, casualty and theft losses, and gambling losses. The threshold amount would be $200,000 for single filers and $250,000 for married filers, and those thresholds would be indexed for inflation. The tax value of itemized deductions would be further limited for higher-income filers. "The proposal would limit the value of all itemized deductions by limiting the tax value of those deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets. This limitation to the 28% bracket would apply even after deductions have been reduced. Personal Exemptions: Personal exemptions are reduced for higher-income filers. This reduction is eliminated in 2010. The current administration would reinstate the reduction beginning in 2011 for single filers with income over $200,000 and married filers with income over $250,000. Capital Gains and Dividends: Currently, qualified dividends and long-term capital gains are taxed at rate of 15% or zero percent for the taxpayers in the two lowest tax brackets. These rates are scheduled to expire at the end of 2010, at which time capital gains would be taxed at 20% and dividends would be taxed at ordinary income taxes rates. A proposal exists that capital gains and qualified dividends be taxed at 20% for taxpayers in the top two tax brackets of 36% and 39.6%, at 15% in the middle two tax brackets, and at zero percent in the lowest two tax brackets. The new rates would take effect in 2011. Information Reporting: Reporting on non-employee compensation is required only for payments of $600 or more paid to individuals and to other non-corporate recipients. A proposal is in place to require that information reporting be expanded to include corporate recipients. Additionally, a proposal exists to increase reporting requirements for certain types of life insurance policies, requires contractors to provide businesses with their correct name and taxpayer identification number, and would allow business to withhold tax on non-employee payments at a rate of 15%, 25%, 30%, or 35%, with the rate of tax selected by the contractor. Fines would double for failing to submit the required documents to the IRS. Foreign Bank Account Reporting: Currently, American citizens and residents report to the US Treasury whether they own bank accounts in foreign countries. A proposal exists to expand the amount of information reported about foreign accounts. Americans would be required to report transfers to or receipts from accounts held abroad if they totaled $10,000 or more during the year. Furthermore, it is proposed that banks and other financial institutions submit reports to the IRS about transfers made by Americans to foreign bank accounts or about foreign accounts opened. Americans would also be required to report information about their foreign accounts on their income tax return in addition to filing the annual foreign bank account report with the Treasury Department. Penalties: Repeated late filing of tax returns would become a felony, punishable by up to five years in jail or a fine up to $250,000. A felony offense would be failing to file a tax return in any three years within any consecutive five-year period in which the total tax liability is at least $50,000. Currently, failing to file a tax return is a misdemeanor offense, punishable by up to one year in jail and a fine of not more than $25,000. The penalty for writing a bad check (which currently covers only checks and money orders) would be expanded to include any "commercially acceptable payment," including electronic payments. Statute of Limitations: Currently the IRS cannot assess additional tax or initiate an audit after three years from the date a tax return is filed. This three year period also applies to receiving refunds from the IRS. It is proposed to allow the statute of limitations to be extended by up to two years for federal changes in a tax return related to an audit by a state or local tax agency. Offer in Compromise: Taxpayers would no longer have to submit non-refundable lump-sum or periodic payments when requesting an offer-in-compromise from the IRS to settle an outstanding tax debt. Starting in 2006, the tax laws required a taxpayer to begin making payments on a proposed settlement at the time that an offer is requested.