Ruminations on Tax Planning for 2009

It’s too early to say with certainty what changes will be made in the tax laws this year. But it’s possible to make some educated guesses.

Tax Cuts, or Increases?
Things seem to be skewing towards tax cuts for middle income taxpayers in 2009. Moreover, higher income earners probably won’t see tax rate increases this year.

If the present economic malaise does not extend past 2009, chances are good that tax rate increases will be enacted for the highest tax brackets in 2010. Instead of topping out at the current 35%, the top income tax rate could return to 39.6%, with top capital gains rate increasing as well.  However, if the economy doesn’t respond positively to stimulus efforts, tax rate hikes will probably be delayed.

Death and Taxes
Since the estate tax is currently scheduled to be repealed in 2010, Congress is likely to revive the estate tax for that year.  Most probably, the $3.5 million exemption amount that applies in 2009 will be extended to 2010. Congress may even surprise everyone and decide what it will do about the status of the estate tax post-2010.

Standard Deduction: Encore Boost for Property Taxes
Last July, the Housing And Economic Recovery Act included a one-time break for taxpayers whose deductions didn’t exceed the standard deduction ($10,900 for MFJ in 2008), but who paid property taxes.  Normally, you can’t deduct property taxes at all if your total deductions are not high enough.  This change permitted such taxpayers to boost their standard deduction by the amount of property tax paid, up to a limit of $500/$1,000 (Single/MFJ).

The Emergency Economic Stabilization Act of 2008 (ESAA) extended this deduction into 2009. This isn’t much help for high income taxpayers, who are more likely to have large mortgage and state tax deductions, but it’s helpful for people who own their homes outright, who live in states without income taxes, or whose mortgage interest payments are too small to trigger itemizing. Taxpayers to whom this break applies will likely benefit by ensuring that they pay out at least as much in property taxes as the deduction limits allow. For some, this might mean prepaying property taxes in 2009.

Alternative Minimum Tax (AMT)
Planning for the AMT is tricky enough, but it’s a lot harder when the status of the tax is so uncertain. Taxpayers normally at greatest risk of being nicked by the AMT are those with high levels of certain kinds of deductions:

State income taxes

Property taxes

Medical deductions

“Miscellaneous” Schedule A deductions

Also, taxpayers exercising incentive stock options (ISO) are subject to AMT on the bargain element of the option: the difference between the option exercise price and the actual price of the stock.

As part of the ESAA, Congress provided a one-year reprieve for taxpayers who were otherwise slated to pay the AMT on their 2008 income.  The AMT exemption amount was increased by almost $25,000 for couples and $12,450 for singles. The one-year fix reduced projected tax receipts by about $60 billion.

If a similar adjustment is not provided in 2009, the number of taxpayers subject to the AMT is expected to increase from 5 million to almost 25,000,000. Many of those affected will be households with income in the range of $100,000 to $500,000.  With budget deficits looming, it will be tough for Congress to provide the same break in 2009. My guess (and it’s just a guess) is that Congress will permit taxpayers at the upper ranges to be nicked for the first time by the AMT.

About the author

Thomas Fisher, CFP®

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