Fall 2009 Volume XIV, No. 1 Newsletter

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Fall Notes:

winterCongress has enacted another stimulus plan known as The American Recovery and Reinvestment Act of 2009. While spending is the largest component of the plan, this is also a major tax bill. These tax provisions are aimed at stimulating the economy by increasing spending, increasing employment, and providing incentives for education and clean energy via the use of tax credits. As you'll recall, credits are better than deductions because credits reduce your income taxes dollar for dollar. The stimulus bill also contains another temporary Alternative Minimum Tax (AMT) patch to the tax code that will keep millions of taxpayers from having to pay AMT. What this really means to our clients is that the AMT bite for 2009 won't be any worse than 2008 - Congress has been applying a one-year patch every year for several years now. We try to identify some changes affecting you below:

Tax Changes for 2009:

  • For 2009 only, the Alternative Minimum Tax has been patched so that married couples receive an AMT exemption of $70,950, a $4,700 increase from year-ago levels. Single individuals will see their AMT exemption rising to $46,700.
  • For 2009, the first-time homebuyer credit that was signed into law last year has been modified to increase the credit to $8,000 and by removing a requirement that the credit be repaid over 15 years. The home must be purchased between Jan 1 and Dec 1, 2009 and the credit is subject to income limits of $75,000 for singles and $150,000 for married couples. We like this credit because it is a true tax credit, not an interest-free loan like last year's ill-fated $7,500 homebuyer credit.
  • For 2009 and 2010, the "Making Work Pay" credit will permit single individuals to take a $400 tax credit and married couples to take a $800 tax credit against their earned income subject to income
    limits of $75,000 for singles and $150,000 for married couples. It's a gimmick credit, similar to the previous years' economic stimulus credit, but a nice, freebie credit nonetheless.
  • For 2009, the first $2,400 of unemployment benefits received will be excluded from income.
  • For 2009 and 2010, homeowners can receive up to a $1,500 tax credit when making qualifying improvements such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and cooling systems.
  • To stimulate new car sales, the Act provides a deduction for sales taxes attributable to the first $49,500 of the purchase price of a new car, motorcycle, light truck or motor home. These vehicles must be purchased between February 17 and December 31, 2009. Taxpayers can take the deduction even if they don't itemize. The deduction begins to phase out when Adjusted Gross Income (AGI) reaches $125,000 for single filers and $250,000 for joint filers.
  • For 2009 and 2010, many people paying for college expenses will benefit from an expansion of the Hope Credit for post-secondary educational expenses. Renamed the "American Opportunity Tax Credit", the maximum allowable (credit) amount will be $2,500 versus $1,800 under previous tax law. This credit can be used for expenses incurred for up to four years of study, so it will largely replace the existing Lifetime Learning Credit for college expenses. The new credit phases out for couples with AGI above $160,000 ($80,000 for singles), so it's available to many more families than the previous HopeCredit which phased out at $100,000 of AGI.

Tax Planning Corner

Five Overlooked Gems:

Here are five possible tax breaks for 2009. Some may apply only to those clients who itemize. Others can be claimed by any qualifying client:

  1. Charitable Volunteering: If you volunteer for a charitable organization, and you buy supplies, the cost is deductible. Use of your car for charitable purposes may also be deducted.
  2. Moving Expenses: Employees and self-employed individuals may deduct the reasonable expenses of moving themselves and their families if the move is related to starting work in a new location. The move must be greater than 50 miles. Deductible moving costs are limited to the cost of transportation of household goods, and travel to the new residence.
  3. Job Hunting Expenses: Qualifying costs for job hunting expenses include but are not limited to resume preparation, printing and postage, phone calls, outplacement and agency fees.
  4. Child and Dependent Care: Did you know the popular child and dependent care tax credit also applies to summer day camp costs? Make sure to note the camp's address and Federal Identification Number (EIN) when preparing to deduct these costs.
  5. Mortgage Refinancing Points: If you refinance your home or buy a second residence, the loan "points" you pay can be deducted over the life of the loan. Plus, if you sell the home or refinance again before you have deducted the full amount of points, you can then deduct that remaining amount in the year of the refinancing or sale.

Social Security and You:

From time to time we field questions regarding the maximum amount of one's salary that will be hit by the Social Security taxes. Here's an overview:

The Social Security "wage base" for 2009 - the maximum amount of wages subject to the Social Security tax - is $106,800, according to the Social Security Administration. This amount is up nearly 5% from the $102,000 for 2008. The Social Security wage base is adjusted each year to reflect average wages. The wage base for 2010 will be announced later this year. An increase in the wage base means a tax increase for millions of upper-income workers.

With the 2009 wage base, the maximum amount that your employer should withhold for this year is 6.2% of $106,800, or $6,621.60. For an employee, the combined rate for Social Security and Medicare is 7.65%. The Social Security portion is 6.2% on earnings up to the taxable maximum, and the Medicare portion is 1.45% on all earnings. For someone who is self-employed, the combined rate is 15.3%.

About 164 million workers will pay Social Security taxes in 2009. Of those, some 7% will pay higher taxes as a result of the increase in the taxable Social Security maximum. That amounts to 11 million people according to the Social Security Administration.

Here's a tip that may help: If you work for two or more employers this year, check to see whether you had too much in Social Security tax withheld. You can get credit on your Federal income tax return for any excess amount that you paid.

Closing:

Thank you for the many referrals throughout the spring and summer -- they are very much appreciated. As we head into fall and winter, I encourage each of you to visit with me for year-end planning. I know you will agree that it's time well spent.

Our fabulous dinner seminar which was held on February 5, 2009 at Ruths Chris Pier Five location, was sponsored by the hard-working folks from the brokerage firm of Scott and Stringfellow, along with the support of BB&T Bank. Specifically I'd like to thank Martin Miller and Farley Shiner who arrived from Richmond to give us their insights. Looking back, February and March weren't great times to be invested, but Martin and Farley both demonstrated great resolve, and through their presentation gave us ample reasons for staying the course. As a postscript, Mr. Shiner's fund is currently graded five stars (highest rating) from Morningstar, where it is ranked in the top two percent of it's category (mid cap growth) over the past three years.

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Matthew R. Horowitz, C.P.A.
(410) 312-7622 • email
10015 Old Columbia Rd. Suite B-215, Columbia, Maryland 21046