Top Ten Tax Changes For 2009

The American Recovery and Reinvestment Act (the “Stimulus Bill”) passed in February contained a number of important tax changes. Many of the tax changes dealt with providing tax breaks to the unemployed or encouraging spending in certain areas of the economy such as automobiles, energy efficiency or education. The following is a brief summary of the major changes that have significant tax and investment implications. We expect a number of additional tax changes to occur in the first part of 2010 as a result of the continuing debate regarding universal health care coverage.

However, we anticipate these tax changes to be effective starting in 2010 so stay tuned for our analysis next year. If you have any questions about the affect of these tax changes on your personal situation, please contact us at 407-629-6477./p>

1. Payroll Tax Credit. The Stimulus Bill provides a new payroll tax credit for workers in 2009 and 2010. This credit equals 6.2% of earned income but is capped at $400 for singles and $800 for couples. In contrast, retirees who receive Social Security benefits received a one time $250 check during the second quarter of 2009. The payroll tax credit starts phasing out at $75,000 of adjusted gross income for singles and $150,000 for couples. In contrast to prior tax credits, there was no rebate check for this credit. Instead, employees received the credit during 2009 as a result of reduced income tax withholding on their regular paychecks. Since the reduced withholding resulted in only about $10-$20 extra per week, most people did not see much of a difference in their paychecks.

2. First Time and Long-Time Resident Homebuyer Tax Credit. In an effort to help the real estate market, the Stimulus Bill improved and expanded the existing tax credit for first time homebuyers. In 2008, the maximum credit was $7,500, which was required to be paid back to the government over a subsequent 15 year period. The new credit is equal to 10% of the purchase price up to $8,000 and does not have to be repaid. In fact, this credit is fully refundable, meaning that if a homebuyer’s tax obligation is less than the credit, the homebuyer will receive a check from the government for the difference. To qualify, the principal residence needed to be purchased between January 1 and November 30 of 2009 by someone who has not owned a home in the three years prior to the date of purchase. In addition, the credit starts to phase out at $75,000 of adjusted gross income for singles and $150,000 for couples. If the home is sold or no longer used as a principal residency within three years of the purchase date, the credit must be paid back. On November 6, this first time homebuyer tax credit was expanded for five months until April 30, 2010 with an additional two months provided to settle on the purchase. In addition, the income limits were raised to $125,000 for singles and $225,000 for couples. More importantly, the law extending this credit also expanded the eligibility requirements for purchasers. A long-time resident homebuyer credit of up to $6,500 is available to those who do not qualify as first time homebuyers. This exception applies to buyers who have owned and used the same house as a primary residence for at least five consecutive years during the eight year period ending on the date of purchase of a new home as a primary residence. In addition, there is no requirement that the prior residence be sold before the new one is purchased. This long-time resident exception dramatically expands the scope of the homebuyer tax credit to now include those that are changing primary residences for the first time in several years.

3. ROTH IRA Conversion Rules. In 2006, Congress passed legislation that extended the lower tax rates on capital gains and qualified dividend income through the end of 2010. In order to fund these tax reductions, Congress modified the eligibility rules for converting traditional IRAs to ROTH IRAs beginning in 2010. These modifications removed the current restriction that limits ROTH conversions to taxpayers with adjusted gross income less than $100,000. Starting in 2010 and beyond, ROTH conversions are now permitted for taxpayers regardless of income. However, for conversions done in 2010, income taxes due on a conversion can be spread over two years as the conversion amount may be included as taxable income on 2011 and 2012 tax returns. Investors will hear a lot about this one time opportunity in 2010 to spread out the tax bite over the subsequent two years. DO NOT BE PERSUADED BY THESE CONVERSION ARGUMENTS. The conversion process increases your taxes causing you to send more of your money to the government today. Investors should always be looking for ways to reduce their current tax bill, not increase it.

4. New Vehicle Sales Tax Deduction. To help the auto industry, the Stimulus Bill provides a tax break to new (not used) vehicle purchases between February 16, 2009 and January 1, 2010. Taxpayers can deduct the state and local sales and excise tax paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is limited to taxes paid on the initial $49,500 of the vehicle’s purchase price and starts to phase out at income levels of $125,000 for individuals and $250,000 for couples. This deduction is also available as an addition to a taxpayer’s standard deduction in the event they do not itemize. Taxpayers who want to add this sales tax deduction to their standard deduction must include a new Schedule L to their return. This new tax schedule also includes the real estate tax add-on to the standard deduction of up to $500 for singles and $1,000 for couples. These add-ons to the standard deduction provide extra tax saving opportunities for those who do not itemize their deductions.

5. Energy Tax Credits. The Stimulus Bill expanded the available tax credits for energy efficient home improvements in 2009 and 2010. The law increased the rate to 30% of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500. Qualified energy efficiency improvements include, among other things, insulation materials, exterior doors and windows, central air conditioners, and certain types of water heaters and roofs. In addition, another energy tax credit was expanded for homeowner purchases of certain alternative energy equipment. This credit now equals 30% of expenditures, including labor costs, on qualifying property such as solar electric systems or solar hot water heaters. No dollar cap exists on the amount of credit available for this particular energy tax credit. The expansion of these credits was designed to further encourage energy efficient investments by homeowners.

6. Partial Exclusion from Tax for Unemployment Benefits. The receipt of unemployment benefits has always been taxed just like any other income. However, the Stimulus Bill provides that the first $2,400 of unemployment benefits received in 2009 is tax free. This tax free exemption applies only to unemployment benefits received in 2009. Unfortunately, since the exemption amount is relatively small, this tax break provides limited benefit to the unemployed.

7. Expansion of Education Tax Credit. The American Opportunity Tax Credit temporarily replaces the Hope Credit in 2009 and 2010. The amount of this new education tax credit is 100% of the first $2,000, plus 25% of the next $2,000 for a maximum credit of $2,500. This credit now covers up to four years of post-secondary education (up from two years) and includes the cost of tuition, fees and course materials such as books (but not room and board). If the credit is more than an individual’s tax liability, 40% of it is refundable. The credit begins to phase out at the higher income limits of $80,000 for singles and $160,000 for couples. In contrast, the Lifetime Learning Credit begins to phase out at $50,000 for singles and $100,000 for couples while the deduction for tuition begins to phase out at $65,000 for singles and $130,000 for couples. By raising the income limits for eligibility and expanding coverage to four years of college, this new educational tax credit is now available to more taxpayers than other educational credits.

8. Health Insurance Assistance. The Stimulus Bill helps terminated employees with the cost of continuing their health insurance coverage. Unemployed individuals who elect to retain their health insurance coverage from their employer under applicable COBRA rules can get 65% of the premium paid for by the federal government for up nine months. To be eligible, employees must be involuntarily terminated between September 1, 2008 and December 31, 2009. This subsidy terminates upon offer of any new employer-sponsored health care coverage or Medicare eligibility. In addition, this subsidy becomes taxable if adjusted gross income exceeds $125,000 for individuals and $250,000 for couples. Unfortunately, this assistance creates a bit of a headache for employers who must pay the subsidized portion of the premium up front and then receive a credit on their payroll tax returns after the fact.

9. Alternative Minimum Tax (AMT) Partial Relief. Rather than waiting until the end of the year, Congress accelerated its annual ritual of increasing the exemption amount for AMT income by including the applicable increases in the Stimulus Bill. For 2009, the exemption amount increased to $46,700 for individuals and $70,950 for couples. The exemption amounts are the amounts of AMT-taxable income taxpayers can earn before incurring AMT. This extension is limited to 2009 and taxpayers who were previously subject to AMT will most likely be subject to it again this year.

10. Contribution Limits Remain Constant for IRAs/401(k)s/403(b)s. For 2009 and 2010, the annual IRA contribution limit will remain at $5,000 with a catch-up contribution of $1,000 allowed for those over age 50. The contributions limits for retirement plans such as 401(k)s and 403(b)s remain at $16,500 for 2009 and 2010. For those over 50, the additional catch-up contribution remains at $5,500, allowing a maximum contribution of $22,000 in 2009 and 2010 for those over age 50. The limit for Simple IRAs also remains the same at $11,500 with an extra $2,500 permitted for those over age 50.

The legal and tax information contained herein is merely a summary of our understanding and interpretation of current tax laws as of December 18, 2009 and is not exhaustive. Where indicated, past performance is not a guarantee or indication of future performance. Nelson Investment Planning Services, Inc. offers securities through Nelson Ivest Brokerage Services, Inc., a member of FINRA, MSRB and SIPC.