The “cash for clunkers” program may be history, but you can still get a special deduction from the IRS if you purchased a new car before the end of the year. A provision in the American Recovery & Reinvestment Act of 2009 (ARRA) allows a deduction for state and local sales and excise taxes imposed on a car purchase. The deduction is limited to the sales and excise taxes and similar fees paid on up to $49,500 of the purchase price of a new vehicle. You can take this deduction even if you do not itemize your deductions. However, it is subject to income limits, so you have to make under $125,000 as an individual, or $250,000 if you are married filing jointly to claim the full tax benefit. With 2010 models arriving in dealer showrooms, there is still time to get a new car for less.

Energy-Efficient Home Improvements

The Recovery Act allows a credit for 30 percent of the cost of improvements for homeowners who make energy-efficient improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems. The maximum credit is $1,500 for improvements made in 2009 and 2010. Qualifying for this credit can be tricky, but most reputable energy contractors have information on which of their products are covered. For example, you cannot just buy an air conditioner which meets certain energy efficiency standards. Your entire heating and cooling system must meet the standards. Here is a summary of items qualifying for the credit:

For 2009 and 2010, the following items are eligible for the credit:

   • Windows and Doors
   • Insulation
   • Roofs (Metal and Asphalt)
   • HVAC
   • Water Heaters (non-solar)
   • Biomass Stoves

Tax Credit for First Four Years of College

The American Opportunity Credit is allowed for the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it refundable and available to more taxpayers, including those with higher incomes. Tuition, related fees, books and other required course materials all qualify now. The maximum annual credit is $2,500 per student.

Computer Technology Purchases Allowed for 529 Plans

For 2009 and 2010, computer equipment and internet access can be paid by a qualified tuition program (QTP), commonly referred to as a 529 plan. Software designed for sports, games or hobbies does not qualify unless it is predominantly educational in nature.

ROTH IRA ROLLOVER RESTRICTIONS LIFTED IN 2010

In 2008, taxpayers were for the first time allowed to roll over amounts in employer plans, such as 401(k)s, into Roth IRAs. Before then, taxpayers had to move the funds to a traditional IRA first, then to a Roth IRA. In addition, until the end of 2009, there is an income limit on Roth rollovers. Taxpayers can only do Roth rollovers if they have adjusted gross income that does not exceed $100,000. In 2010, this income limitation is abolished and taxpayers will be able to roll over amounts from an employer plan or a traditional IRA into a Roth IRA without limit.
When you roll over fund into a Roth IRA, you usually have to pay income taxes on those amounts. If you do Roth rollovers in 2010, you will be able to take rolled over amounts into income over two tax years, 2011 and 2012. Allowing you to split the income over two years will reduce the tax rate you will have to pay on the rollover amounts. These law changes are very favorable to taxpayers and allow you great flexibility in reinvesting your retirement funds, but the rules are complex. Please contact me if you want to discuss your options.

END OF THE YEAR TAX PLANNING TIPS

If you can move quickly, you can use some basic tax planning tools to reduce your 2009 business and individual income taxes. Here are some ways to save on this year’s tax bill:

   1. Defer Income: If possible under your accounting method, delay the receipt of payments you are owed until after the new year

   2. Increase Business Expenses: Buy items for your business this year, with credit cards if necessary. That way you can maximize your deductions for this year. You can buy office supplies and equipment and pay some of your business bills early, such as phone services, utilities, insurance, rent, and professional subscriptions.

   3. Contribute to a Retirement Plan: Make an extra contribution to your retirement plan before the end of the year.
   4. Make Charitable Contributions: Donate to your favorite charity by the end of the year if you have not bumped up against your charitable contribution limits. If you have an estimate of what you have already given in 2009, I will be glad to advise you on whether or not it would be worth it to make additional donations.

   5. Prepay your State and Local taxes: If your cash flow allows it, prepay state and local taxes before the end of the year.

CONCLUSION:

There is always mixed news about tax developments. For every new tax bill that makes it through Congress, there are winners and losers. Even if your tax burden may increase due to 2009 changes, there are legitimate, legal ways to rearrange your personal and business affairs to minimize any additional burden. I always stand ready to discuss your concerns and to advise you on our ever-evolving tax system. Please do not hesitate to make an appointment to see me soon if you need tax advice.