The IRS adjusts key tax numbers each year, including personal exemptions and the standard deduction amounts.  These are cost of living adjustments required by law.

The effect of these adjustments is that the tax brackets widen (so you can earn more income before you jump into the next tax bracket).

Here are a few of the changes in effect for 2009:

• The personal and dependency exemption, available to most taxpayers, increased $150 to $3,650.
  
• The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals
  filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions (itemized deductions include mortgage interest, charitable contributions and state and local taxes).
• Tax-bracket thresholds increased for each filing status. For a married couple filing a joint return, for example, the taxable-income
  threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
• The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

The amount you can contribute to retirement plans also increases for 2009:

• The amount you can contribute to your 401K or 457 plan is increasing $1,000 to $16,500
• The limitation for Simple IRA accounts is increased from $10,500 to $11,500
• The limitation for IRAs and Roth IRAs is the same as 2008: $5,000, plus a $1,000 catch up contributions for taxpayers age 50 and over

For other changes, including the income limitation for taxpayers who qualify for the retirement savings credit, please visit the IRS website.

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Not many people are aware of the saver’s credit, which helps offset part of the first $2,000 that taxpayers contribute to IRAs , Roth IRAs, 401K and other retirement plans.  This credit is also known as the retirement savings contributions credit.

The saver’s credit is available in addition to other tax deductions and credits that a person may qualify for, so taxpayers who take a deduction for contributions made to IRAs, 401Ks and other tax-deferred retirement accounts, and who also qualify for the saver’s credit, essentially get a double tax break.

You still have time to make contributions to your retirement accounts and get the saver’s credit, if you qualify.  The deadline for setting up or adding money to IRAs and still get credit for 2008 is April 15, 2009.  But if you’re planning on contributing to your 401K or other employer sponsored plan, you need to get your contributions in by the end of the year.

The following people qualify for the saver’s credit:

• Married couples filing jointly with incomes below $53,000 ($55,500 in 2009),
• Taxpayers filing as head of household, with income below $39,750 ($41,625 in 2009), and
• Single taxpayers (including married individuals who file separately) with incomes up to $26,500 in 2008 (or $27,750 in 2009)

While these income limits may seem low, if you are starting a new business, are unemployed or underemployed in any given tax year, this tax credit provides incentive to continue saving for your retirement by giving you some of your contributions back in the form of a credit.

The saver’s credit is a refundable tax credit which means it can increase your refund or reduce any tax you owe.  The maximum saver’s credit is $1,000 ($2,000 for married couples), but most people qualify for much less, depending on how much you save in your retirement account, your income, and other deductions and credits.

To claim the saver’s credit, file Form 8880 and attach it to your tax return (Form 1040).  This credit was made a permanent part of the tax code in 2006, and is adjusted annually to keep up with inflation.

For more information about the saver’s tax credit, please visit the IRS website at www.irs.gov.

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One of the most common tax planning strategies is to max out your contributions to your retirement plans to reduce your taxable income.

For IRAs, you have until the tax filing deadline (April 15) to do this, but for 401K, 403B and other employer sponsored retirement plans, you have to do this by the end of the calendar year.

The maximum amount you can contribute to 401K, 403B and 457 plans is $15,500 in 2008 (in 2009 you’ll get to contribute an extra $1,000 as the limit is increasing to $16,500).

You may be wondering if you should contribute more to your retirement plan given the stock market this year.  Actually, since stock and mutual fund prices are off by an average of 40% this year, you should be contributing to your retirement accounts.  Remember ‘buy low, sell high’?  Well now is a great time to buy low.

So not only can maxing out your retirement plan be a great tax planning strategy, for this year, it’s also a great investing strategy.

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It’s hard to believe we’re almost at the end of the year already.  As I write this, there are only a few weeks left in 2008.

Most people probably aren’t thinking about taxes yet, but the time to do tax planning is before the year ends.  Once December 31 has passed, there’s very little you can do to help reduce your 2008 taxes.

The first step in tax planning is to determine where you are for the year.  Pull out last year’s tax return for a reference.  You also need your most current profit and loss statement, so if your books aren’t up to date, now’s the time to get caught up.

Compare your income and expenses to last year’s tax return.  Is your income up?  Do you have the same amount of deductions as last year?  If your income is up, or if your expenses were down, you may owe more taxes than you did last year.

If you are a small business owner you should be very familiar with estimated tax payments.  Have you paid in enough taxes to avoid the under-payment penalty?  The general rule of thumb is that if you expect to owe a balance due of $1,000 or more, after all of your payments (from withholding, tax credits, etc.), then you need to make estimated tax payments.

Once you have compared your current year income and deductions to last year’s tax return, where do you stand?  Do you have more taxable income this year?  If you do, then you can defer income or accelerate expenses to reduce your taxable income for the year.  Just remember, these strategies will likely increase your taxable income for the following year; your tax plan should be long-term, not just for the current year only.

Defer Income:  One way to reduce your current year taxes is to defer income.  If you are a small business owner, you have more control over this than wage earners do.  If you have accounts that you expect to bill in the last week or two of December, consider delaying your invoicing until the last few days of December or even the first few days of January.  Cash basis taxpayers report income when it’s received, so if you invoice a customer on December 28, and you don’t receive payment until January 2nd, then the income will be reported on the next year’s tax return instead of the current year.

Accelerate expenses:  Another way to reduce your taxes is to pay expenses ahead of time.  If you can see that your income is higher this year and you want to minimize your taxes, determine which expenses you can pre-pay before the end of the year to reduce your taxable income.  Some examples include your rent, insurance, utilities, or other invoices you receive at the end of the year that aren’t due until after December 31.  Also, consider stocking up on supplies, inventory, or other items you’ll need to purchase soon anyway.  Do you have any plans to upgrade your equipment or computers?  Consider doing those before the end of the year as well.

Another way to minimize your taxes is to fund your retirement account.  As a small business owner, you have a number of options including traditional IRAs, SEP IRAs, Simple IRAs, or 401K plans.  Determine which plan is best for you and fund it before the due date (this is the one strategy that doesn’t have to be done before the end of the year).

This is just a basic guideline for year-end tax planning.  To determine the strategies best for you and your small business, discuss year-end tax planning with your tax professional.  But don’t wait too long… the year will be over before you know it!

Resources:

Tax Planning & Estimates
The New Biz Tax Consultation

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