The first step to year-end tax planning is to determine where you stand. The strategies that have traditionally been implemented at year-end may need to be adjusted to conform to today's specific financial environment. If your income is down this year, don't make the mistake of overlooking planning. Year-end tax planning is as much about the 2010 year as it is about the 2009 year. With only a few weeks left until the end of the year, you may have to act quickly to benefit from certain strategic tax moves. Year-end planning may be even more essential for anyone who has had a change in circumstance during the past year (marriage or divorce, birth or death of a family member, acquisition or sale of a business, promotion or loss of a job, etc).

Do a projection first
Now is the time to optimize your tax situation. Most tax tips, suggestions and strategies are of little practical help if you do not have a solid understanding of your current tax and cash flow situation. Knowing where you stand now will determine what you need to do prior to year-end. Begin by reviewing last year's tax return, your current account and investment statements, and your income to date for the year. Follow that with a projection for next year. The projection is vital in this economy, as it will give you a guideline for the next six to twelve months and help you determine your course of action. Also, remember that a tax loss in the current year may be able to be carried back to obtain a refund of prior taxes paid.

Determine whether you need to accelerate or delay income/deductions
Traditionally, this is the time of year when we might delay income and accelerate deductions to position ourselves better from a tax perspective. However, it is likely that you may have had reduced income or incurred losses this year, which makes the strategy a little different at year-end. If you lost income or incurred a loss this year, consider the following actions:

• Sell capital gain property
• Take distributions from retirement accounts
• Consider Roth conversion options
• Postpone payment of medical expenses until January
• Postpone any expenses that generate deductions until 2010
• Defer bonus and salary increases until January through your employer, if possible
• Maximize use of deductions only if they will help your tax position or put more money in your pocket

Cancel or adjust salary / withholding
Once you've determined where you stand financially, figure out your projected taxes for this year and next year. If you calculate that you've overpaid your taxes, which may be common this year, cancel your federal income tax withholding for the month of December and adjust it for the first quarter of 2010. Conversely, if you project that you'll owe a significant amount of tax this year, adjust your federal income tax withholding accordingly. You don't want to be in a position where you will be penalized for underpaying taxes, nor do you want to give the government an interest-free loan.  If you own your own business and don't need the wages to support a retirement plan contribution, consider foregoing salary for a month or two in order to save payroll taxes.

Consider converting a traditional IRA to a Roth IRA
If your traditional IRA was invested in beaten-down stocks (or deflated mutual funds), consider converting it to a Roth IRA. This may increase your adjusted gross income for 2010, but could be beneficial now as well as in the long-term. The eligibility requirements are changing as of January 1, 2010 (please see "To Convert or Not to Convert?").

Give charitably
If making year-end charitable contributions will substantially help your tax position, consider making gifts. You may give up to $13,000 ($26,000 for married couples) per year to as many individuals as you wish without incurring any gift tax consequences. However, the gift tax exclusions do not carry over from year to year. Give generously now for future tax benefits to your recipients (children, grandchildren, etc).

If charitable contributions will benefit you, consider donating money or property to individuals or charities before year-end. By making donations with appreciated stock, you will avoid paying tax on the capital gain that you would normally incur if you sold the property.   By making donations with depreciated stock, you may avoid having a capital loss that cannot be deducted (only the first $3,000 of a net capital loss is deductible in any year). The fair market value is used to measure the donation, and there is no tax on the difference between your cost and the fair market value. Generally, you can contribute appreciated assets equal to 30% of your adjusted gross income to a public charity in each calendar year. Excess contributions may be carried forward for up to five years. Remember that charitable contributions must be substantiated with bank records or receipts. Note that donations by credit card are currently deductible if the account is charged before 2010.

Determine whether you owe Alternative Minimum Tax
If a special tax calculation exceeds your regular income tax liability, you must pay the AMT for 2009. But it may be possible to reduce or eliminate AMT liability by postponing certain "tax preference" items. Certain controllable items that trigger AMT, such as real estate taxes and state income tax payments, should be evaluated to determine whether to pay in late 2009 or early 2010.

The top AMT rate for 2009 remains at 28%. The AMT exemption amounts are $46,700 (individuals) and $70,950 (married filing jointly). Tax-exempt interest on private activity bonds issued after December 31, 2008 and before January 1, 2011 is not an item of tax preference for purposes of the AMT. 

Spend all available FSA funds
If you have pre-tax flexible spending accounts (FSA) for child care or medical purposes, make sure that you maximize your benefits by using the account's value in full. If you leave a balance in your FSA at the end of the year, you will lose the money. It does not carry over into the new year. If you still have money in your account, take action: fill recurring prescriptions early, purchase new glasses or contacts, and have some long overdue dental work done before December 31st. Increase the amount you set aside for next year if you didn't have enough this year. Remember to budget for tax-free reimbursements for over-the-counter drugs.

Be aware of the Kiddie Tax
Under the kiddie tax, unearned income received by a child may be taxed at the parent's top tax rate if the child's income exceeds a specified threshold. For 2009, the kiddie tax generally applies to a child under age 19 (age 24 for full-time students) with unearned income above $1,900. When it is practical, try to keep income under or near this threshold through astute investments.

Take advantage of education credits
The tax law allows certain taxpayers to claim one of two special tax credits for sending their children to college. But the tax credits are phased out at relatively modest income levels. For 2009, the revamped "American Opportunity Tax Credit" has been extended by ARRA so that it is fully available to joint filers with an AGI up to $160,000 ($80,000 for single filers). Pay next semester's tuition before 2010 to qualify for the credit this year.

Purchase a new vehicle
There is a deduction that allows you to deduct state and local sales taxes paid on the purchase of qualified new vehicles, including light trucks, SUVs, motorcycles and motor homes. You may deduct the sales and excise taxes attributable to the first $49,500 of the new vehicle's price provided it is purchased prior to January 1, 2010. But this new deduction is phased out for high-income taxpayers. The phaseout begins if AGI exceeds $250,000 for joint filers ($125,000 for single filers). The deduction is available to both those who itemize their deductions as well as to non-itemizers.

Install qualified energy-efficient appliances at home
The residential energy credit has tripled from 10% to 30% for qualified installations made in 2009 and 2010. The list of qualified expenses ranges from skylights to energy-efficient furnaces to simple insulation materials. The lifetime dollar cap has been increased to $1,500. The annual dollar limitations on all residential energy credits except fuel cells has been eliminated, maintaining the 30% credit for eligible solar water heaters, solar electricity equipment, qualified small wind energy equipment, and qualified geothermal heat pumps.

Year-end planning is key
Take a few minutes to plan with your trusted advisor as soon as possible. Our firm specializes in advising individuals and businesses on ways to minimize your taxes and maximize your long-term financial well-being. If you have any questions about which tax strategies might be appropriate for you, or how to implement them successfully, please contact us. We will help you identify the best strategies to help you make the most of year-end planning and position you for a secure 2009. There are additional "survival" strategies and year-end planning techniques that we can assist you with to help you through these tough economic times. Call us today. We can help.

Kevin E. Reynolds, CPA is a Partner in our Tax Services Department and is based in our Boca Raton office.  With over 15 years of experience in public accounting, his goal is to help clients minimize their total tax liability and make financially sound, tax-savvy business decisions.  Focusing on the health care, real estate and retirement plan industries, Kevin is able to provide expertise and guidance in addressing such complex issues as cost segregation, like-kind exchanges, mergers and acquisitions, and corporate structuring.  As the firm's leader of the retirement plan advisory practice, he provides assistance in planning and structuring retirement plans, ensuring that the plans are designed for maximum tax advantage.