As the end of the year approaches, real estate professionals should undertake tax planning designed to reduce their income tax liabilities for year 2009 and future years. Below is a non-exhaustive checklist of tax-saving moves that may be available. Most of the strategies are premised upon the time-honored principles of deferral of income into future years and acceleration of deductions into the current year.
High-income earners, however, should take into account that many observers expect the top federal tax rates will increase in future years, thus making the deferral of taxable income less appealing. Even long-term capital gains rates may jump up. Accordingly, it may be beneficial to recognize profits or gains this year at the comparatively lesser rates.
- Maximize deductions. Consider extending your subscriptions to professional journals, paying professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor. Consider using a credit card to prepay expenses that can generate deductions for this year.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year. You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income ("AGI"). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher-education tax credits, the above-the-line deduction for higher-education expenses and deductions for student loan interest.
Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year, or if the tax rates for next year are increased. This strategy may backfire, however, as previously discussed.
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. Meet with a tax advisor to discuss year-end trades you should consider making.
- Plan for your future. If you are self-employed and have not done so yet, set up a self-employed retirement plan.
- Consider converting a traditional IRA to a Roth IRA. If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into Roth IRAs, if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009. On a related note, effective January 1, 2010, even taxpayers with higher income are eligible for establishment of, or conversion to, Roth IRAs.
- Evaluate increasing your tax withholdings. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009. Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
- Estimate the effect of any year-end planning moves on the Alternative Minimum Tax (AMT) for 2009. Keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
- Think green. If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, a credit of up to $500 may be available for such improvements if made this year. In addition, substantial tax credits are available for installing energy-generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credit will be larger this year than last for expenses over $6,667. If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it is eligible for the credit, and, if so, purchase it before year-end.
- Manage business losses. If you have losses from businesses that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions. If you own an interest in a partnership, a limited liability company or an S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
- Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option (under IRC §179) for assets bought and placed in service this year. The maximum expensing amount will drop to $25,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets), and the expensing option is phased out if property placed in service during the year exceeds a ceiling which is $800,000 for 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally will not be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
- Give wisely. You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals, but you cannot carry over unused exclusions from one year to the next. If you are thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
- First-time homebuyer tax credit. Consider taking advantage (or assisting a younger generation family member in taking advantage) of the tax credit, in the amount of 10% of purchase price of the residence, not to exceed $8,000 if purchased prior to December 1, 2009.
- Take advantage of health flexible spending accounts (FSA) or health savings accounts (HSA) if you have access to them. Increase the amount you set aside for next year in an employer's FSA if you set aside too little for this year. Do not forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. If you become eligible to make HSA contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2009.
Substantial tax savings may result by implication of the identified strategies to the extent applicable to particular circumstances of the real estate professional. Consultation with tax advisors is, of course, an imperative aspect of the planning process.