Cataldo, Anthony J., II

Curatola, Anthony P.

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West Chester UniversityDigital Commons @ West Chester UniversityAccounting Faculty Publications Accounting12-2009End of the Year Tax PlanningAnthony J. Cataldo IIWest Chester University of Pennsylvania, acataldo@wcupa.eduAnthony P. CuratolaFollow this and additional works at: http://digitalcommons.wcupa.edu/acc_facpubPart of the Taxation CommonsThis Article is brought to you for free and open access by the Accounting at Digital Commons @ West Chester University. It has been accepted forinclusion in Accounting Faculty Publications by an authorized administrator of Digital Commons @ West Chester University. For more information,please contact wcressler@wcupa.edu.Recommended CitationCataldo, A. J., & Curatola, A. P. (2009). End of the Year Tax Planning. Strategic Finance, 13-61. Retrieved fromhttp://digitalcommons.wcupa.edu/acc_facpub/13As 2009 draws to a close, manypeople try to make some last-minute financial moves for taxplanning purposes. This year, theymay need to rethink some of thetraditional tax strategy moves forDecember as a result of applicabletax provisions in 2009 and 2010.This article will review some ofthe provisions and discuss someunconventional thinking for theend-of-year tax planning that mayapply to your clients, your family,or even you.Required Minimum DistributionsSection 201(a) of the Worker,Retiree, and Employer RecoveryAct of 2008 provides a one-yearsuspension of the required mini-mum distribution (RMD) rules forcalendar year 2009 from definedcontribution plans (IRC §401(a),§403(a) and §403(b)), certain IRC§457(b) plans, and individualretirement plans. Thus individualshave the option to take or not takea distribution from their plan for2009. For the moment, this is onlya one-year suspension. The appli-cation of this suspension isstraightforward, but there are a fewissues to be mindful of. First, a per-son turning 70.5 in 2008 isrequired to take the first RMD byApril 1, 2009, for 2008 but isn’trequired to take the second RMDby December 31, 2009, for 2009.Likewise, a person turning 70.5 in2009 isn’t required to take the firstRMD by April 1, 2010, for 2009 butis required to take the second RMDby December 31, 2010, for 2010.Cut-Back RuleFor taxpayers whose adjusted grossincome (AGI) exceeds $166,800($83,400 for married filing sepa-rate tax returns) for tax year 2009,IRC §68 provides that the amountof itemized deductions otherwiseallowable for the tax year arereduced by the lesser of 1% of theAGI amount exceeding the thres-hold limits or 80% of the amountof the itemized deductions for thetaxable year. For example, a tax-payer with an AGI of $220,000 will effectively lose $832 (1% of($250,000 – $166,800)) of other-wise deductible itemized deduc-tions in 2009, a tax increase ofapproximately $200.But the cut-back rule is phasedout for 2010. Thus, a taxpayer willbe able to deduct his or her fullamount of itemized deductions in2010. In the above example, thetaxpayer would increase his or heritemized deductions by $832, a taxsavings of approximately $200. Butthen in 2011, the original cut-backrule returns, and taxpayers lose 3%of their itemized deductions abovethe threshold limit. The lost item-ized deductions in the earlierexample increases to $2,496 (3% of ($250,000 – $166,800)), a taxincrease of approximately $600.Because the threshold amount of$166,800 is adjusted annually forinflation, the actual tax increasewould be less because the thresh-old amount would have increasedfor both 2010 and 2011.Although it may be impossibleto shift some income from 2009 to2010, thereby reducing the effectsof the cut-back rule, an individualstill has time to shift some taxdeductions from 2009 to 2010 andincrease total allowable deductionsover the two-year period. Forexample, an individual may wantto delay some charitable contribu-tions until January. Likewise, it maybe better not to make the January2010 mortgage payment in Decem-Anthony P. Curatola, EditorBy A.J. Cataldo, II, CMA, CPA, and Anthony P. CuratolaTAXESEnd-of-the-Year Tax PlanningSome of the typical end-of-yeartax planning moves may need tobe reconsidered given changes toapplicable tax provisions in 2009and 2010. It may be wise to delaycharitable contributions andproperty tax payments until 2010or to advance a planned purchaseof qualified property into 2009instead of 2010. Here’s a look atsome possible strategies.D e c e m b e r  2 0 0 9 I S T R AT E G IC  F I N A N C E 1314 S T R AT E G IC  F I N A N C E I D e c e m b e r  2 0 0 9ber 2009 and, if possible, make theDecember 2009 mortgage paymentin January 2010. If a taxpayer gen-erally makes a property tax pay-ment in December, it might be wiseto postpone that payment untilJanuary. Obviously, the objectivehere is to shift some of the allow-able itemized deduction from 2009to 2010 in order to thereby maxi-mize the overall deductions overthe two-year period.On the flip side, an individualneeds to start considering the taxchanges that are due in 2011. As aresult, an individual may want toincorporate the opposite strategy;that is, advance to the end of 2010some payments that otherwisewould be made at the start of 2011.For example, a person may want toprepay state income taxes for 2011in 2010. There’s a two-sided effectto this tax strategy. First, it increas-es the itemized tax payments for2010. Second, it simultaneouslyincreases the income in 2011 fromthe larger state income tax refund,which also reduces itemized deduc-tions in 2011.Small BusinessesTaxpayers may want to incursome expenses in 2009 that areabove the line deductions toreduce their AGI figure. Thepurchase and placing in servicedepreciable property by busi-nesses is an ongoing process thatrequires business owners to evalu-ate the value of retaining orreplacing the property. The over-riding factor in this decisionprocess is the added value offeredby technological improvements tothe productivity of equipment aswell as the age and maintenancecost of the existing equipment.For 2009, IRC §179 and bonusdepreciation tax provisionsbecome additional factors to beconsidered by owners when con-templating the replacement of, oradditions to, existing equipment.IRC §179 (also known as imme-diate expensing) permits smallbusiness owners to annuallyexpense for taxable year 2009 up to$250,000 of the cost of qualifyingproperty placed in service for thetaxable year. (The amount decreas-es to $125,000 for 2010 and$25,000 for 2011.) In general, qual-ifying property is defined as depre-ciable tangible personal property(i.e., §1245 property) that’s pur-chased for use in the active con-duct of a trade or business. The$250,000 amount is decreased dol-lar for dollar when a businessplaces more than $800,000 of qual-ified property in service during thetax year. That is, a business thatplaces $860,000 of qualified prop-erty in service in 2009 would beeligible to deduct $190,000 underIRC §179. The remaining $670,000would be eligible for bonus andMACRS depreciation.In addition to IRC §179, a busi-ness owner is able to claim anadditional first-year depreciationdeduction (also known as bonusdepreciation) in the amount of50% of qualified property placedin service in 2008 or 2009 only.Depreciable property that gener-ally qualifies for the 50% bonusdepreciation in 2009 includesMACRS property (with a usefullife of 20 years or less), computersoftware (not amortized underIRC §197), water utility property,and qualified leasehold improve-ment property. This provision isautomatic unless the taxpayerelects out of the provision.Finally, the business taxpayercan depreciate the remainingadjusted basis of the first-yearproperty under the MACRS taxprovision over the asset’s life. Forinstance, in the earlier example,the business owner placed in ser-vice $860,000 of qualified proper-ty for which he was able to claim$190,000 under IRC §179. Theadjusted basis of the property after §179 is $670,000, and thisamount would next qualify forbonus depreciation of $335,000($670,000 5 50%). The remainingadjusted basis of $335,000($860,000 – $190,000 – $335,000)would further be reduced by thedepreciation as calculated underMACRS. If these assets were listedas five-year property, then anadditional $67,000 ($335,000 520%) would be depreciated(assuming that most of the pur-chases occurred prior to thefourth quarter). In total, this tax-payer would be able to depreciatea total of $592,000 of the $860,000property placed in service.Several OptionsTax planning always is an art, and2009 is no exception. As shown inthis article, a taxpayer may be wiseto delay a payment until 2010(e.g., charitable contributions andTAXESSmall businesses maywant to incur someexpenses in 2009 thatare above the linedeductions to reducetheir AGI figure.cont inued on page  61 property tax payments) or make apayment in 2010 for 2011 andlikewise advance a purchase (e.g.,qualified property) in 2009. Ofcourse, these are just a few of thepossible opportunities. SFA.J. Cataldo, II, CMA, CPA, Ph.D.,is a professor of accounting at WestChester University in West Chester,Pa. He is also a member of IMA’s West Chester Pennsylvania Chap-ter. Contact A.J. by e-mail atacataldo@wcupa.edu.Anthony P. Curatola is the Joseph F.Ford Professor of Accounting atDrexel University in Philadelphia,Pa., and a member of the GreaterPhiladelphia Chapter. You canreach Tony at (215) 895-1453 orcuratola@drexel.edu.© 2009 A.P. CuratolaD e c e m b e r  2 0 0 9 I S T R AT E G IC  F I N A N C E 61Taxescont inued f rom page  14 

End of the Year Tax Planning

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End of the Year Tax Planning

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