President Obama Signs Unemployment Insurance Extension Act; Contains Important New Tax Benefits; Enrolled Agents Recommend End-of-Year Tax Planning

November 6, 2009

SACRAMENTO, Calif., Nov. 6 /PRNewswire-USNewswire/ -- As part of the government's efforts to encourage people to spend money to help revive the economy, the House voted 403-12 Thursday to expand a popular tax credit for homebuyers. The bill, which also extends unemployment benefits and expands a tax break for money-losing businesses, was signed on Friday by President Obama.

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The new Act contains several key provisions for both taxpayers and tax professionals. End of year tax planning puts you in the best position to minimize tax. Your Enrolled Agent can fill you in on the details of this latest tax package, the other law changes that have occurred in this new administration, as well as year-end moves sure to affect your tax bill for 2009.

Enrolled Agents (EAs) are tax professionals licensed by the federal government to represent taxpayers and assist them with tax planning and the preparation of tax returns. Key tenets of the new Act:

New/Extended Credit: Buy a home before May 1, 2010 and collect up to $6,500 from the government (up to $8,000 if you're a qualifying first-time homebuyer).

Net Operating Loss Carryover: Small businesses with a loss in 2008 or 2009 can claim refunds of taxes paid within the prior five years. There's no limit on carrybacks for the first four years of the period, but for the fifth year the carryback is limited to 50% of the company's taxable income.

E-Filing: The Act calls for mandatory e-Filing beginning in 2011 for any tax professional who expects to file more than 10 individual, trust, or estate returns.

End of Year Tax Planning

With these, other recent tax law changes, and an increase in concern about tax issues as the economy continues to struggle, Members of the California Society of Enrolled Agents urge taxpayers to sit down with their tax professionals for end-of-year tax planning. Planning now will save you money and reduce your tax liability not only with your federal taxes but also with your state taxes. Here are a few tax tips that will help you accomplish your goal.

Basic Numbers

Because many tax benefits are tied to or limited by adjusted gross income (AGI)--IRA deductions for example--a key aspect of tax planning is to estimate both your 2009 and 2010 AGI. Also, when considering whether to accelerate or defer income or deductions you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2008 tax return and your 2009 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI.

Another important number is your "tax bracket," i.e., the rate at which your last dollar of income is taxed. The tax rates for 2009 range from 10% to 35%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).

Deferring Income to 2010

If you expect your AGI to be higher in 2009 than in 2010 or if you anticipate being in the same or a higher tax bracket in 2009, you may benefit by deferring income into 2010. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket and subject to a 20% additional tax.

Accelerating Income Into 2009

In limited circumstances you may benefit by accelerating income into 2009. For example you may anticipate being in a higher tax bracket in 2010 or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note however that accelerating income into 2009 will be disadvantageous if you expect to be in the same or lower tax bracket for 2010. In any event, before you decide to implement this strategy you should "crunch the numbers."

Members of the California Society of Enrolled Agents are required to fulfill 20% more education than required by the IRS and to adhere to a strict code of ethics. Taxpayers in California who seek professional assistance with tax planning can locate Enrolled Agents in their area online at www.csea.org or by calling toll-free 800-TAXPRO-5. Outside California, the Enrolled Agent referral number is 800/424-4339.

SOURCE California Society of Enrolled Agents