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Tax lessons from the 2009 filing season
May 04, 2009

You've just filed your 2008 tax return and the last thing you likely want to think about is the next filing season. However, it never hurts to have a leg up, and with the end of filing season and the 2009 tax year well underway, now is a great time to take a look back and learn some lessons from this filing season that can undoubtedly help you next year. The following is a list of top lessons individuals can learn from this year's filing season in anticipation of filing their 2009 returns for next year.

Sell losing stocks

If the stock market continues to batter your portfolio, consider selling off your losing stock if you did not do so in 2008. You can use up to $3,000 in net capital losses to offset your ordinary income. And if your net capital losses for the 2009 tax year exceed $3,000, you can carry the excess forward. These carried-over losses can be used to reduce any future capital gains, and can be carried-forward until they are all used.

Legislation has been introduced in Congress to increase the $3,000 limit. One bill would double the limit to $6,000; another would raise it to $10,000. However, with Congress looking to reduce the huge federal budget deficit, it's unlikely that these proposals will be enacted soon so it's best to plan for the immediate future using the $3,000 limit. Our office will keep you posted of developments.

Fine-tune withholding

If you paid too much in withholding, or not enough, you should adjust your withholding. If you received a large tax refund, you probably had too much withheld from your paycheck. Don't use your money to make Uncle Sam an interest-free loan, especially when your money could be put to better use during these economic times.

This year taxpayers have an additional reason to review their withholding. The American Recovery and Reinvestment Act of 2009 created the Making Work Pay credit. This refundable tax credit is being delivered to many workers through reduced withholding in their paychecks. You do not have to submit a revised Form W-4 to receive the credit. However, you may want to submit a revised Form W-4 if you have more than one job. Married couples with two incomes should also review their withholding as should pension recipients. Our office can help you determine if you should adjust your withholding to offset the Making Work Pay credit.

Adjust estimated tax payments

If you didn't pay enough through estimated tax (or withholding) for 2008, carefully do the math this year to ensure you do not face significant penalties and interest. Not paying enough in estimated tax can hurt financially, since penalties and interest for failing to make estimated tax payments can be high. The penalty for underpayment of estimated tax is calculated by multiplying the current interest rate for underpayments by the amount of any underpayment for the period of the underpayment.

Retirement savings and required minimum distributions

Although it may be difficult in light of the current state of the economy, contribute to your retirement plan, or consider starting one if you have not already. The contribution limit to an Individual Retirement Account (traditional or Roth), is $5,000 for 2009. Individuals aged 50 and above can make "catch-up" contributions for 2009 up to $6,000.

The Worker, Retiree, and Employer Recovery Act of 2008 suspended required minimum distributions (RMDs) from qualified retirement accounts for 2009 only. For qualified participants, this may required careful financial and tax planning.

Coping with unemployment

The loss of a job creates new tax issues. Unemployment compensation is taxable income although there is a temporary exclusion for the first $2,400 of unemployment compensation received in 2009. Severance pay and payments for accumulated vacation or sick time are also taxable.

Many individuals are tempted to tap retirement savings while unemployed. If you withdraw funds from an IRA before age 59 1/2, you may have to pay a penalty and include the amount in your income. There are some exceptions to the penalty, such as using IRA finds to pay for medical insurance premiums while unemployed. You may also qualify for a temporary subsidy for COBRA continuation coverage. Higher-income individuals may have to repay the subsidy so it's important to weigh the costs and benefits of the subsidy before taking it.

If you are looking for work in 2009, make sure you carefully track your job search costs. Various expenses you incur to look for work are deductible. It is not necessary for the job search to be successful for the expenses to be deductible.

Depreciation and expensing

Bonus depreciation and small business expensing under Code Sec. 179, both extended through 2009, require careful planning. However, not every business needs to use these incentives. Businesses have through 2009 to take advantage of enhanced and extended first-year 50 percent bonus deprecation and small business expensing under Code Sec. 179.

Credits and deductions

Do your homework carefully. If your income drops in 2009 you may be eligible for existing and modified deductions and credits that you may not have been entitled to in 2008, or may have been reduced because of your higher income. Consider tax credits and deductions that will expire at the end of 2009, such as the first-time homebuyer credit and the new car sales and use tax deduction.

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