The IRS adjusts many tax numbers for inflation each year. Other numbers change as a result of tax law revision. In your tax planning for 2009, take the following changes into account:
• The maximum earnings subject to social security tax increases to $106,800 for 2009. As before, all earned income (wages and self-employment income) is subject to Medicare tax. The social security earnings limit for retirees under full retirement age increases to $14,160. There is no earnings limit for those who have reached full retirement age.
• The top estate tax rate remains at 45%, but the exemption amount increases to $3.5 million for 2009. The annual gift tax exclusion increases to $13,000 per donee.
• The nanny tax threshold increases to $1,700 for 2009. If you pay household workers more than this amount during the year, you're responsible for payroll taxes.
• The kiddie tax threshold increases to $1,900. If your child has more than $1,900 of unearned income in 2009 (e.g., dividends and interest income), the excess could be taxed at your highest rate if your child is under age 19 (under age 24 if the child is a full-time student).
• The first-year business equipment expensing limit goes back to its 2007 amount (as adjusted for inflation). Unless Congress changes this limit (and the expectation is that they will), the limit for 2009 is $133,000. The phase-out level is $530,000.
• The standard mileage rate for business driving in 2009 goes down to 55¢ per mile, and the mileage rate for medical and moving expenses is 24¢ a mile. The general rate for charitable driving remains at 14¢ a mile.
• The adoption credit increases to $12,150 for 2009 adoptions.
• There are some changes to the retirement plan contribution limits for 2009. The maximum contribution for an IRA remains at $5,000 for those under age 50, and at $6,000 for those 50 and older. The SIMPLE plan limit increases to $11,500 for individuals under age 50, and to $14,000 for those 50 and older. The 401(k) limit increases to $16,500; those 50 and older can contribute up to $22,000.
For details or for assistance as you begin your 2009 tax planning, give our office a call.
The Stimulus Act of 2008 provided qualifying taxpayers with rebate checks last year. People who did not receive the maximum allowed or whose circumstances have changed since last year may be eligible for the 2009 version of the rebate — a "recovery rebate credit."
The recovery rebate credit will be based on 2008 tax return information, so filing a 2008 return is necessary. Circumstances that could make a person eligible for the credit include a 2008 income change from 2007, the birth or adoption of a child in 2008, a change in the amount of social security or veterans' benefits received in 2008, and a change in dependency status (no longer being claimed as a dependent on someone else's return in 2008).
The IRS Web site at www.irs.gov provides information on eligibility and procedures for claiming the credit.
Trillions of dollars disappeared from taxpayers' retirement accounts in the closing months of 2008, thanks to the crisis in the financial markets. If your IRA lost value, you might have a tax opportunity to consider.
Convert your Traditional IRA to a ROTH IRA
Converting to a Roth triggers income tax on the value of your IRA, but since your IRA's value has dropped, the tax would also be lower. The benefit: Qualified withdrawals from Roth IRAs are tax-free while withdrawals from traditional IRAs are subject to ordinary income tax. There is a $100,000 income threshold to qualify for a Roth conversion in 2009; this income limit ends in 2010.
Recharacterize a ROTH to a Traditional IRA
What if you converted your traditional IRA to a Roth IRA in 2008 before the market took a dive and are now facing income tax on a higher value than your Roth IRA currently has? In this situation, you might consider what is called a "recharacterization" — making a trustee-to-trustee transfer from the Roth back to a traditional IRA, essentially canceling out the original conversion to a Roth and any taxes due.
The rules governing IRAs are complex, so plan to meet with your tax advisor before making any changes. Craft, Noble and Company can help you analyze the options available in your specific circumstances.