Federal tax update and final tax tips as we close out 2009

As we enter the final days of 2009, many federal income tax issues remain unresolved at the federal level due to the Senate's focus on the healthcare bill. The following tax issues and expiring tax breaks are still "to be determined":

1) Federal Estate and Gift Tax - under current law, the federal estate tax is to expire for 2010 and then reappear in 2011 with a top rate of 60% and only a $1 million exemption. The generation-skipping tax will also end for a year, but the gift tax will continue with a top rate of 35%. This issue will definitely be dealt with during 2010, so stay tuned.

2) Expiring "write-offs" - Business R & D credit, college tuition deduction (NOT the Hope or Lifetime Learning Credits), direct donations of IRA distributions - these should all be extended retroactive to 1/1/2010, but it may take a little time to get this done, so stay tuned on these as well. However, the suspending of the mandatory annual IRA payout that was put into law for 2009 will most likely NOT be extended due to the general market recovery.

3) Raising of the Alternative Minimum Tax (AMT) exemptions - this is something that has now been dealt with on an annual basis for the last several years so as not to have the unintended consequences of affecting "the average joe/jane" by subjecting him/her to the alternative minimum tax that was meant for "high incomers" with a large percentage of itemized deductions. Congress has avoided overhauling this section of the tax code and will probably continue to volley this around for the next year or two.

4) Bush tax cuts set to expire - This will be a contentious issue due to the expanding federal deficit and Washington politics, especially as it relates to the top individual tax rate. At this point, we can probably expect to maintain the current tax rates for low and middle-income taxpayers, but an increase to the pre-2001 top tax rate of 39.6% from the current 35% is the most likely scenario.

5) Home Buyer's Credit - This break was extended and expanded. For all of the details, check out the official IRS release at www.irs.gov

For year-end tax tips, please see our Nov. 5 blog entry titled "Some Tax Planning Strategies as We Near the End of 2009".

For all of your tax preparation needs as we enter the 2009 filing season, please visit www.taxsmarty.com We are offering a new and improved CompleteTax® online filing program with four different levels, including a free filing option. Happy New Year!

Maximize your work-related and self-employed travel deductions

If you are a person who travels significantly for your employer or if you are self-employed, you of course want to maximize your tax deductions related to your business travel or self-employment income. One simple and effective way to track your mileage and other travel-related expenses is to keep a small appointment book/calendar in your vehicle and record all of your business miles driven as you travel for business throughout the year. You can also record any tolls paid, meals and entertainment for business purposes, etc. in your appointment book/calendar in order to make sure you are tracking all of your trips and expenses as you incur them. Many people wait until the end of the year and then they end up scrambling to go back and remember all of their trips and expenses and usually end up missing a significant amount of expenses due to their lack of record-keeping. Recording these things as they occur in this simple manner can save you hundreds, if not thousands, of dollars during any given year. Plus, this will help you immensely in the event that you are audited by the IRS or your state taxing authority since this is another level of documentation that you have in addition to the receipts, itineraries, employer travel schedules, etc. that you should be keeping as well.

Please visit TaxSmarty.com for all of your income tax information, preparation and planning needs.

"Bunching" of itemized deductions to save $$'s on your federal taxes

If you find that you are always on the cusp of the standard deduction/itemized deduction limit each year, you should work to “bunch” your deductions every other year in order to try and minimize your tax liability every other year. In the off year, you can simply claim the standard deduction since you are entitled to that amount regardless of what your deductible expenses are for that year. The most common and significant itemized deductions are home mortgage interest, property taxes, state and local income taxes, medical expenses, unreimbursed job-related expenses. charitable deductions and casualty losses.

While you don't have much control over the timing of your mortgage interest payments, you do have some control over the timing of property taxes on your personal (and a second) residence since you are typically billed by your County for property taxes in December that are not due until January. Pay this bill a few weeks early and you could push your itemized deductions over your standard deduction amount for that year. While we're talking property taxes, don't forget that even if you cannot push your total itemized deductions over your standard deduction, starting with your 2008 tax return (and recently expanded through 2009), you can deduct up to $500 (single/married filing separately/head of household) or $1,000 (married filing jointly) in property taxes paid on your main or second home over your standard deduction.

The other deduction that you have some control over is the medical deduction since you do have some control over the actual payment of these types of expenses. Unfortunately, it is very difficult to get over the 7.5% of adjusted gross income threshold that you would need to meet to deduct any of these expenses.

In short, taking advantage of additional tax deductions every other year is certainly better than never realizing the savings at all!

For more free tax tips, please visit TaxSmarty's Online Tax Guide.