More on Year-End Tax Planning

We hope that Thanksgiving treated you all nicely and that we have all recovered from our turkey-induced comas. December 1st is here and as we enter the final month of 2009, it is no time to become complacent with your year-end tax planning. Let's dive into a few more areas to focus on today.

Estimated tax payments are a confusing topic for many taxpayers and can create penalties if incorrectly computed and underpaid. Generally, if your 2008 Adjusted Gross Income (AGI) was $150,000 or less, one way you could avoid 2009 underestimated tax penalties is to make your timely 2009 estimated tax payments based on 100% of your 2008 tax liability. If your 2008 AGI was over $150,000, you can avoid penalties by basing your 2009 estimated tax payments on 110% of your 2008 tax liability. 2009 offers one additional method to avoid underpayment penalties for 2009 only! If you qualify, you can eliminate 2009 underestimated tax penalties by basing your 2009 estimated tax payments on 90% (rather than 100% or 110%) of your 2008 tax liability. To qualify, you must meet the following requirements: you must have had an AGI below $500,000 or $250,000 if married and filing separate returns for 2008 AND you must certify that more than 50% of the gross income on your 2008 return came from a "qualifying small business". For purposes here, a qualifying small business is one that employed, on average, less than 500 employees during 2008. Please contact your accountant as soon as possible if you think that your current tax withholdings or estimated tax payments may not meet one of these safe harbors. If so, we may be able to eliminate the penalty by having you withhold additional taxes from your year-end bonus, distribution from your IRA, etc.

Avoiding the impact of the Alternative Minimum Tax (AMT) is complicated and is affected by a number of different areas. One such area is that of Incentive Stock Options (ISO). If you exercised an ISO in 2009, there is a possibility that it generated AMT if the difference between the stock's value and the exercise price is substantial. If you did exercise such an ISO in 2009 and the stock you acquired has declined in value since the date of exercise, it may be possible to eliminate or reduce your 2009 AMT liability if you sell the stock on or before December 31, 2009. Please check with your accountant if you have exercised ISO's during 2009 and the price of the stock has fallen since the date of the exercise.

One more area to be cognizant of as year-end approaches is that of mutual fund purchases. Many mutual funds typically distribute income, including capital gains, near the end of each year. As such, if you invest near year-end but before the date of record, then you will be taxed on this distribution as if you held the fund the entire year. Before investing, determine the amount and timing of any year-end payout.

Check back with us next week as we look at the tax credits that may be available to you and whether or not you are eligible for the temporary 0% capital gains tax rate.


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