Elements of this proposal have the potential to affect a great many taxpayers, so you may wish to review the proposed changes with your tax advisor.

Tax proposals for business include:

• A tax credit of up to $5,000 for new workers added in 2010, plus a reimbursement for payroll taxes on wage increases.

• For 2010, permitting a maximum of $250,000 to be expensed under Code Sec. 179 , with the investment-based phase-out level set at $800,000.

• Extending bonus first-year depreciation to apply to property placed in service in 2010.

• Allotting an additional $5 billion in tax credits for investment in advanced energy manufacturing projects.

• A zero percent capital gains tax on qualified small business stock held for at least five years, effective for stock acquired after Feb. 17, 2009.

• Making permanent the research credit (which under current rules went off the books at the end of 2009).

• Making permanent the Build America Bonds program.

• Removing company provided cell phones from the listed property category, effective for tax years ending after the enactment date.

• Repealing the lower-of-cost-or-market inventory accounting method, effective for tax years beginning after twelve months from the enactment date.

• Repealing the LIFO accounting method for inventories. Those currently using the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after 2011. However, this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after 2011.

• Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, percentage depletion) for oil, gas and coal companies.

• Extending through Dec. 31, 2011 the Subpart F “active financing” and “look-through” exceptions, the exclusion from unrelated business income of certain payments to controlling exempt organizations, the modified recovery period for qualified leasehold improvements and qualified restaurant property, and incentives for empowerment and community renewal zones.

• Making permanent the 0.2% unemployment insurance surtax.

• Subjecting highly leveraged Wall Street firms to a Financial Crisis Responsibility Fee to cover TARP expenses (i.e., the cost of the federal government's financial institution bailout). The Fee would be levied on the liabilities, net of deposits and certain insurance policy reserves, of qualified firms with more than $50 billion in assets. It would remain in place for at least 10 years, or longer if necessary to fully pay back TARP. The Fee would be effective as of July 1, 2010, and would be reported on the annual federal income tax return.

• Requiring a corporation that enters into a forward contract to issue its stock to treat a portion of the payment on the forward issuance as a payment of interest, effective for forward contracts entered into after 2011.

• Requiring dealers in commodities, commodities derivatives dealers, dealers in securities, and dealers in options to treat the income from their day-to-day dealer activities in section 1256 contracts as ordinary in character, not capital, effective for tax years beginning after the enactment date.

• Amending the definition of “control” in Code Sec. 249(b)(2) to incorporate indirect control relationships of the nature described in Code Sec. 1563(a) , effective on the enactment date.

• A ten-year reinstatement of the three Superfund excise taxes, and the corporate environmental income tax, to begin after 2010.

“Loophole closers” include changing the rules that allow those facing estate and gift taxes to undervalue transferred property, denying a tax deduction for punitive damage claims, repealing preferential tax treatment for commodities dealers and day traders, taxing carried (profits) interests as ordinary income.

Tax proposals for individuals include:

• Extending the Making Work Pay Credit for one year (a tax cut of up to $400 per person ($800 per family)).

• Making permanent the American Opportunity Credit for higher education expenses.

• Extending through 2011 the optional deduction for state and local general sales taxes.

• Increasing the child and dependent care tax credit for families earning up to $113,000 a year.

• Reinstating after 2010 the 36% tax rate for those with taxable income above the following amounts: $250,000 less the standard deduction and two personal exemptions, indexed from 2009, for married taxpayers filing jointly; $200,000 less the standard deduction and one personal exemption, indexed for inflation from 2009, for single filers.

Also, the 28% bracket would be expanded so that taxpayers earning less than the $250,000/$200,000 amounts would not see their taxes rise as a result of the increased tax rate brackets.

• Reinstating beginning in 2011 the 39.6% tax rate (it would apply to those with taxable incomes over $373,650 before inflation adjustment).

• Beginning in 2011, a 20% tax rate would apply to long-term capital gains and qualified dividends of married taxpayers filing jointly with income over $250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000 less the standard deduction and one personal exemption (indexed from 2009). Taxpayers below these income levels would be subject to the rates that currently apply (i.e., 0% or 15% rate) to long capital gains and qualified dividends.

• Beginning in 2011, reinstating for higher income taxpayers the reduction of itemized deductions and the personal exemption phaseout.

• Beginning in 2001, limiting the tax value of all itemized deductions to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT.

• The 2009 AMT exemption amounts for individuals, as indexed for inflation, would apply for 2010 and future years, and nonrefundable personal credits would offset the AMT as well as regular tax.

• Extending the COBRA premium subsidy to cover workers involuntarily terminated before 2011. Estate, gift, and generation-skipping transfer (GST) taxes would be extended at the levels in effect for calendar year 2009 (a top rate of 45% and an exemption amount of $3.5 million).

Tax proposals for retirement savings include:

• Simplifying and expanding the Saver's Credit to match 50% of a contribution up to $500 per individual ($1,000 per couple) for families earning up to $65,000 (with smaller credits for those earning up to $85,000). Additionally, the saver's credit would become a refundable credit.

• Creation of a system of automatic workplace IRAs to expand access to tax-favored retirement savings. Employers automatically enrolling their employees in IRAs would receive tax credits of up to $250 a year for two years.

• Doubling the maximum credit for small employers that establish new retirement plans to $1,000 per year for three years.

Proposals to help reduce the tax gap include requiring information reporting for payments to corporations, requiring electronic filing for more returns, clarifying when employee leasing companies can be held liable for their clients' federal employment taxes, codification of the economic substance doctrine, and clarified standards for classification of workers as employees or independent contractors.

Please consult your tax advisor regarding how proposed tax changes may impact you or your business.

New for 2010

• No estate tax: For decedents dying after 2009, the estate tax is repealed. With this repeal, the stepped-up basis at-death transfer rule is also eliminated. However, this rule is alleviated somewhat with special elective step-up rules.

• Roth IRA conversions: Regardless of income, taxpayers can convert traditional IRA accounts to Roth IRA accounts. Previously, taxpayers with modified adjusted gross income over $100,000 could not make the conversion. Also, married persons filing separate returns are now eligible to make the conversion. Note that the converted amounts are includible in income; however, for conversions taking place in 2010, a taxpayer can elect to ratably include the amount over two years in 2011 and 2012.

• Recapture of first-time homebuyer credit: For first-time homebuyers who purchased a principal residence before Jan. 1, 2009, and took the then-$7,500 credit, 2010 marks the first year of recapture, in what amounts to a $500 repayment.

• Phase outs of itemized deductions and personal exemptions: The overall limitation on itemized deductions for taxpayers with AGIs above a threshold amount does not apply. The phase out for personal exemptions for higher income taxpayers also does not apply.

Expiring in 2010

• Education credit: The American Opportunity Credit replaced the Hope Education Credit for 2009 and 2010 only. The benefits of the new credit are: (1) required course materials, such as books qualify; (2) the credit is increased to up to $2,500; (3) income level phase outs are higher; (4) forty percent of the credit is refundable.

• Non-business energy property credit: A 30% credit (up to $1,500, less if any credit was taken in 2009) is available if you make certain energy efficient improvements to your home. Such improvements include high-efficiency heating and air conditioning systems, water heaters, windows, skylights, doors, insulation and roofs. The improvements must be made to an existing principal residence. A manufacturer's certificate must accompany the qualifying property.

• Residential energy efficient property credit: Taxpayers receive a 30% credit for installing solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. The property can be purchased for both an existing principal residence and for new construction. A manufacturer's certificate must accompany the qualifying property.

• First-time homebuyer credit: First-time homebuyers (including long-term residents) are eligible for the tax credit if the purchase contract is entered into before May 1, 2010, and closing takes place before July 1, 2010. These dates are extended by one year for members of the military on extended active duty.

• Lower capital gains rates: The 15% capital gains rate (0% for taxpayers below the 15% tax bracket) will increase to 20% in 2011. Qualifying dividends taxed at reduced capital gains rates will be taxed at ordinary income rates beginning in 2011.

• Increased first-year asset expensing: For 2010, the amount eligible for asset expensing is $134,000. Beginning in 2011, the amount is reduced to $25,000 (indexed for inflation).

• Expanded NOL carrybacks: Businesses may carryback NOLs for up to five years for losses incurred in taxable years beginning after Dec. 31, 2007, and beginning before Jan. 1, 2010, but can only elect for one taxable year, not two. Businesses are able to offset 50% of the available income from the fifth taxable year preceding the loss, and 100% of all income in the remaining four carryback years.

• Refundable portion of child tax credit: The earned income formula for the determination of the refundable child credit applies to 15% of the taxpayer's earned income in excess of$3,000. This allows more earned income to qualify in order to determine how much of the credit is refundable. Beginning in 2011, the amount will be considerably higher.

• Higher earned income tax credit: The temporary increase in the EITC percentage from 40% to 45% for families with three or more qualifying children ends in 2010. Additionally, the marriage penalty relief, through an increased threshold phaseout amount for married couples filing joint returns, expires.

• Lower income tax rates: Legislation in 2001 reduced the tax rates on ordinary income through 2010. The current rates of 10%, 15%, 25%, 28%, 33%, and 35% could all change beginning in 2011.

• Child tax credit dollar amount: The $1,000 per qualifying child credit amount is set to be reduced to $500 beginning in 2011.

Expired in 2009

• Sales taxes paid on new vehicle purchases: If you purchased a new car after Feb. 17, 2009, and before Jan. 1, 2010, the sales tax paid on up to $49,500 of the purchase price was deductible. The deduction phases out for higher income taxpayers.

• Increased AMT exemption amounts: For 2009, the AMT exemption amounts were $70,950 for married filing jointly, $35,475 for married filing separately, and $46,700 for singles and heads of household. For 2010, the exemption amounts are significantly lower (unless Congress acts to adjust): $45,000 for married filing jointly, $22,500 for married filing separately, and $33,750 for singles and heads of households.

• Waiver of required minimum distributions (RMDs)for IRAs and other retirement savings plans: When a taxpayer turns 701/2 , he or she is required to take a distribution from his or her retirement account. However, for 2009, that rule was eliminated. Beginning in 2010, the RMD rule returns.

• Unemployment compensation: 2009 marked the only year that the first $2,400 of unemployment compensation received was not includible in income.

• Tuition deduction: An above the line deduction for qualified tuition and related expenses, up to $4,000, depending on income.

• Research credit: The tax credit for research and experimentation expenses.

• Bonus depreciation: The additional first-year depreciation for 50% of basis of qualified property.

• Deduction for state sales taxes: The election to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.

• Charitable contributions from IRA accounts: The ability to distribute up to $100,000 tax free to charity from an IRA maintained for an individual whose has reached age 701/2 .

• Educator expense deduction: The $250 above the line deduction for qualifying educators for expenses paid for books and supplies used in the classroom.

• Increased first-year asset expensing: For 2009, the amount eligible for asset expensing was $250,000.

• D.C. first-time homebuyer credit: Purchases made before Jan. 1, 2010, qualify for the $5,000 D.C. first-time homebuyer credit.

• Nonrefundable personal credits offsetting AMT: Only through 2009 could nonrefundable personal credits offset a taxpayer's alternative minimum tax. However, this rule does not apply to the adoption credit, the child tax credit, the saver's credit, the residential energy efficient property credit, and the American Opportunity credit, among others.

While there are other minor changes that have taken place from 2009 to 2010, the above list represents tax changes that most likely will impact your 2010 taxes. You also should be aware that Congress is in the middle of deliberations that could lead to the extension of some of the above-mentioned expired or expiring tax provisions.

You should contact your tax advisor if you have any concerns about how any of the tax law changes might affect you.

And as part of the effort to rein in a mushrooming debt, the President's FY 2011 budget proposals include many revenue raising proposals, some of which adopt or modify EGTRRA automatic sunsets.

The following information compares and contrasts current law with what's in store under the EGTRRA sunsets and under the President's budget proposals in three areas: tax rates; taxation of capital gains and qualified dividends; and deductions in general.

Tax rate structure. Under current tax rules, the first slice of taxable income is taxed at 10%, and the second slice at 15%. The size of the 15% tax bracket for married taxpayers filing joint returns (and qualified surviving spouses) is twice the 15% tax bracket for individual filers. The top four tax brackets are 25%, 28%, 33%, and 35%. Beginning in 2011, if Congress doesn't make changes, the following rules automatically will be in place under the EGTRRA sunset rule:

• The first slice of taxable income will be taxed at 15%; in other words, the bottom 10% bracket will disappear.

• The size of the 15% tax bracket for married taxpayers filing joint returns (and qualified surviving spouses) will be 167% of the 15% tax bracket for individual filers.

• The top four brackets will be 28%, 31%, 36%, and 39.6%.

Under the Administration's FY 2011 budget proposals, these rules would apply beginning in 2011: (1) The bottom four brackets would remain at 10%, 15%, 25%, and 28%. The size of the 15% tax bracket for married taxpayers filing joint returns would continue to be twice the 15% tax bracket for individual filers, and the 28% bracket would be expanded to assure that taxpayers won't see their taxes rise as a result of the increase in the top two brackets (see below). (2) The top two brackets (currently 33% and 35%) would rise to 36% and 39.6%. (3) For married taxpayers filing jointly, the 36% rate would apply to taxable income above $250,000 less the standard deduction and two personal exemptions, indexed from 2009; and for single taxpayers it would apply to taxable income above $200,000 less the standard deduction and one personal exemption, indexed from 2009.

If there were no inflation adjustment the 36% rate would start at taxable income of $231,300 for married taxpayers filing jointly ($250,000 − $11,400 standard deduction − $7,300 for two personal exemptions) and at $190,650 for single taxpayers ($200,000 − $5,700 standard deduction − $3,650 personal exemption). (4) The 39.6% bracket would apply to taxable incomes over $373,650 for married taxpayers filing jointly, heads of household and single filers, with the taxable income level indexed for inflation for 2011 and subsequent years.

What about the AMT? Under Code Sec. 55(a) , the alternative minimum tax (AMT) exemption amounts for 2010 dropped to $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married couples filing separately (by contrast, for 2009, they were $46,700, $70,950, and $35,475 respectively). Also, many nonrefundable personal credits claimed after 2009 are subject to certain limitations. They can't exceed the excess of: (a) the individual's regular tax liability, over (b) the individual's tentative minimum tax, determined without regard to the AMT foreign tax credit. For 2009, this limitation didn't apply.

It seems a safe bet (at this writing, at least) that the AMT will continue more or less in the form it existed in 2009. At the very least, Congress will enact another one-year “patch” to restore AMT exemption amounts for 2010 to their 2009 levels (as indexed for inflation), and to allow nonrefundable personal credits to offset the AMT as well as regular tax.

And under the President's FY 2011 budget proposals, the 2009 AMT exemption amounts for individuals, as indexed for inflation, would apply for 2010 and future years, and nonrefundable personal credits would offset the AMT as well as regular tax.

Taxation of capital gains and qualified dividends. Under current rules, most long-term capital gain (more technically, net capital gain that is adjusted net capital gain) is taxed at a maximum rate of 15%. If the long-term capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate. (Qualified dividends are taxed to non-corporate shareholders at the same rates that apply to long-term capital gain.)

Beginning in 2011, if Congress doesn't make changes, long-term capital gains will be taxed at 20%. Additionally, dividends paid to individuals will be taxed at the same rates that apply to ordinary income.

Under the Administration's proposals, beginning in 2011, a 20% tax rate would apply to long-term capital gains and qualified dividends of married taxpayers filing jointly with income over $250,000, less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000, less the standard deduction and one personal exemption (indexed from 2009). Taxpayers below these income levels would be subject to the rates that currently apply (i.e., 0% or 15% rate) to long term capital gains and qualified dividends.

Deductions. Under current rules, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 200% of the standard deduction for single taxpayers. For 2010, higher-income taxpayers don't face an AGI-based reduction of itemized deductions, or an AGI-based phase-out of personal exemptions.

Beginning in 2011, if Congress doesn't act, under the EGTRRA sunset rule the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) will be 167% of the standard deduction for single taxpayers.

A higher-income taxpayer's itemized deductions (except for deductions for medical expenses, investment interest, casualty, theft or wagering losses) will be reduced by 3% of AGI above an inflation-adjusted figure, but deductions won't be reduced by more than 80%. Also, a higher-income taxpayer's personal exemptions will be phased out when AGI exceeds an inflation-adjusted threshold.

Under the Administration's FY 2011 proposals:

• The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would remain at 200% of the standard deduction for single taxpayers.

• The AGI-based reduction of itemized deductions and the AGI-based personal exemption phase out would be reinstated for higher income taxpayers.

• The tax value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT.

The President's 2011 budget proposals would make a number of other deduction and credit changes. For example, it would extend through 2011 the optional deduction for state and local general sales taxes, and make permanent the American Opportunity Credit for higher education expenses.

If you have questions about how these proposals may impact your tax planning, please contact your tax advisor.

Most planners believed that permanent estate tax reform, or at least a one year patch, would be passed prior to year end. However, despite predictions to the contrary, one year of zero estate tax is here.

As 2010 has begun, the prospects for estate tax legislation are uncertain. If Congress passes legislation later in the year and attempts to make the legislation retroactive to January 1st, we will likely see a string of lawsuits challenging the constitutionality of such retroactivity.

Current estate plans are significantly affected by the current state of the estate tax law. Typical trust documents and wills do not account for an environment with no estate tax. Often, wills or living trusts contain language that divides a decedent’s property into a “family” trust and a marital trust (or an outright bequest to a spouse). The portion going to the family trust is generally the maximum amount that can pass free of federal estate tax with the balance of the decedent’s assets passing to the marital trust or spouse.

Because of this change, a death in 2010 may cause the unintentional over-funding of the family trust by directing all assets to the family trust and the under-funding of the marital trust/spousal amount. While many family trusts have the surviving spouse as a beneficiary, having the spouse’s funds in trust may not have been the intention of the estate plan. You should, therefore, review your estate documents with your tax advisor and attorney as soon as possible to ensure that your intentions will be carried out regardless of the changes in the estate tax law.

Another significant consequence of estate tax repeal for 2010 is carryover basis. Traditionally, inherited property has a new tax basis equal to fair market value on the date of death. This basis adjustment prevented capital gains tax if the beneficiary sold the property. However, effective January 1, 2010, the basis of inherited property is the lesser of fair market value at the date of death or the decedent’s basis in the property. The result is that we now generally have carryover basis.

As usual, there are some exceptions to the carryover basis rules. The 2010 law provides for a $1.3 million step-up in basis for non-spouse transfers and a $3 million basis step-up for transfers to a surviving spouse. Even with these step-up provisions, far more taxpayers will be affected by capital gains taxes than would have been with 2009 law. If the estate tax is retroactively reinstated, then modified carryover basis should not be a concern. However, if your estate contains low-basis assets, you should consult with your tax advisor about strategies that minimize the overall tax impact related to these assets.

In this uncertain estate tax environment, it is crucial to be proactive with your estate plan and make sure you are taking advantage of favorable estate planning techniques.

In order to plan for the changes discussed here and to make sure your estate is poised for future estate tax legislation in 2010, we encourage you to contact your tax advisor.

Mary Jane Pieroni, CPA, recently has made several presentations to professional and business groups, including seminars on deterring business fraud to both the Town and Country/Frontenac and O’Fallon Chambers of Commerce, and a seminar on deterring fraud in governmental entities to the St. Louis Chapter of the Government Finance Officers Association. Additionally, she conducted seminars on revisions to the Form 990 for Exempt Organizations for the Missouri Society of Certified Public Accountants (MSCPA), as well as for Lorman Educational Services.

And without Congressional “extender” legislation (which has come at the eleventh hour for several years), alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won’t be available to offset the AMT.

High-income-earners have other factors to keep in mind when mapping out year-end plans. Many observers expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less appealing. Long-term capital gains rates could go up as well, so it may pay for some to take large profits this year instead of a few years down the road.

On the other hand, the solid good news high-income-earners have to look forward to next year is that there no longer will be an income-based reduction of most itemized deductions, nor will there be a phase out of personal exemptions. Additionally, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer’s income.

For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 50% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $250,000 expensing limitation; the research tax credit; the five-year write off for most farm equipment; and the 15-year write off for qualified leasehold improve¬ments, qualified restaurant buildings and improvements and qualified retail improvements.

We have compiled a checklist of actions and considerations based on current tax rules that may help you save tax dollars if you act before year end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

Specific actions that may be appropriate for you can be discussed when you meet with your tax advisor to tailor a plan that best addresses your situation. In the meantime, please review the following list and contact your tax advisor at your earliest convenience so that he or she can advise you on which tax-saving moves to make.

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that 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 health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deduct¬ible HSA contributions for 2009.

• 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.

• Time is running out to take advantage of relaxed rollover rules for individuals who took 2009 required minimum distributions (RMDs) even though they didn't have to. In many cases, the situation can be remedied by making a rollover by Nov. 30, even though that is later than the expiration of the usual 60-day rollover.

In general, retirement plan or IRA withdrawals that were made despite the 2009 RMD waiver won't face tax if rolled over to a retirement plan within 60 days. IRS guidance issued last September includes an extension of the 60-day rollover period to Nov. 30, 2009, for certain distributions. However, no more than one distribution from an IRA may be rolled over. The rollover relief provides older taxpayers an unusual opportunity to correct an inadvertent mistake that otherwise would unnecessarily increase their taxable income for 2009. It also gives some individuals a “retroactive” chance to reduce their tax bill if their financial circumstances have improved during the course of 2009.

• Postpone income until 2010 and accelerate de¬ductions 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 acceler¬ate 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.

• 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 a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009.

• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010

• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

• If you expect to owe state and local income taxes when you file your 2009 return next year, consider asking 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, if doing so won’t create an AMT problem (see below).

• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include 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.

• Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their 2009 tax withholding.

• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and qualify for a tax credit. Additional substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.

• You may want to pay contested state income taxes to be able to deduct them this year while continuing to contest them next year.

• If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

• 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 can’t carry over unused exclusions from one year to the next. Because of currently lower real estate and stock market values, 2009 presents unique opportunities. In certain situations, it may make sense to gift in excess of the annual exclusion. Check with your tax advisor to see if this is advan¬tageous for you.

• If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year end, can achieve important tax savings.

• If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.

• Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 mis-cellaneous itemized deductions subject to the 2%-of-AGI floor.

• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2010, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

• Accelerate big ticket purchases into 2009 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction.

•Consider using a credit card to prepay expenses that can generate deductions for this year.

•Generally, when business deductions exceed gross income, the difference is an NOL for tax purposes and may be carried back two years to offset income. This generates a tax refund, providing a cash infusion in times of loss. Any loss that's not absorbed is carried forward up to 20 years.

The American Recovery and Reinvestment Act of 2009 allowed taxpayers to elect to carry back 2008 NOLs from qualifying small businesses (businesses with average gross receipts of $15 million or less for the three years ending with the loss year) for three, four or five years instead of two. The “Worker, Homeownership and Business Assistance Act of 2009” (WHBAA) expands the longer carryback option to businesses that don't qualify as "small" and extends it to 2009 NOLs.

Under WHBAA, generally taxpayers can apply the longer carryback to only one tax year's NOL and to offset only 50% of income in the fifth year back, 100% in the other four. For qualifying small businesses, taxpayers can apply the longer carryback to both 2008 and 2009 NOLs, and the 50% limit applies only to 2009 NOLs. Taxpayers also have the option to use the normal two-year carryback or to waive the carryback period entirely and carry the loss forward.

For tax years ending after 2002, the Act suspends the 90% limitation on the use of any alternative tax NOL deduction attributable to the carryback of an applicable NOL for which the extended carryback period is elected.

• C corporations, like individuals, must also decide when and how to shift income and deductions between 2009 and 2010. C corporations will, as a general rule, benefit from the deferral of income and the acceleration of deductions in the same way as individuals.

However, acceleration of income may be advisable in some cases. Take, for example, a cor-poration subject to the 39% “bubble.” Corporate taxable income between $100,000 and $335,000 is taxed at the rate of 39% to phase out the benefits of the 15% and 25% brackets that cover a corporation’s first $75,000 of taxable income.

Taxable income between $75,000 and $100,000, and between $335,000 and $10 million, is taxed at 34%. Taxable income over $10 million is taxed at 35% except that there is also a 38% “bubble” that applies to corporate taxable income between $15 million and $18,333,333 to eliminate the benefit of the 34% rate.

Assume a C corporation expects taxable income of about $90,000 for 2009 but expects its income to go well over $100,000 in 2010. Accelerating $10,000 in income from 2010 to 2009 will save about $500 in taxes, since the $10,000 will be taxed at only 34% instead of 39% ($10,000 times 5% equals $500). This represents a return of 14.7% on the $3,400 used to make the early tax payment ($500 divided by $3,400).

• Qualifying for small corporation AMT exception. The tentative minimum tax of a corporation is zero for any tax year if the corporation’s average annual gross receipts for all three-tax-year periods ending before that tax year do not exceed $7,500,000. The gross receipts test is applied by substituting $5,000,000 for $7,500,000 for the first three-tax-year period of the corporation that is taken into account under the test. In other words, the $7,500,000 amount is reduced to $5,000,000 for the corporation’s first three-tax-year period.

• Accelerating or deferring income can save estimated tax break. Corporations (other than certain “large” corporations) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year’s tax. However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed a liability for tax. A return showing a zero tax liability doesn’t satisfy this requirement. Only a return that shows a positive tax liability for the preceding year makes the safe harbor available.

These are just some of the year-end steps that can be taken to save taxes. Contact your tax advisor to develop a plan that will work best for you.

Homebuyer credit basics

• Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009.

• The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence's purchase price, whichever is less.

• Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible.

• The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund.

• For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

• Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

The revised homebuyer credit highlights

The new law makes four important changes to the homebuyer credit:

(1) Extension of the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, for credit purposes, a home is considered bought when the closing takes place, so the extra two-months allowed for closing helps buyers who find a home they like but can't close on before May 1, 2010. They can place a contract on the home before May 1, 2010, close on it before July 1, 2010, and, if they otherwise qualify, get the homebuyer credit. In addition, certain members of the military on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit. Plus, under certain circumstances, they also can avoid the recapture rules.

(2) The homebuyer credit may be claimed by certain existing homeowners. For purchases after November 6, 2009, one can claim the homebuyer credit if he or she maintained the same principal residence for any five-consecutive-year period during the eight years ending on the date that the subsequent principal residence is purchased. This may be particularly appealing to “empty nesters” who’d like to downsize their home. Plus, there's no requirement for the current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines before the old home is sold. For that matter, homeowners can hold on to the prior principal residence in the hope of achieving a better selling price later on.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, expanding the credit’s availability to a much bigger pool of buyers. For individuals, the phase out range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

(4) There's a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000 and there is no phase out mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will negate the entire credit. Other homebuyer credit changes.

The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don't qualify for it. The most important of these are:

• Beginning with the 2010 tax return, the homebuyer credit can't be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.

• For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).

• For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed by a taxpayer if he or she can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can't be claimed for a home bought from a person related to the buyer or the spouse of the buyer.

• Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn't changed

The tax law still gives taxpayers the extraordinary opportunity to get their hands on homebuyer credit cash without waiting to file a tax return for the year in which they buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, homeowners can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

High contribution limit

A Solo 401(k) is a type of profit-sharing plan designed for just one person. Perhaps its biggest advantage is that it may allow you to contribute more than you could to other defined contribution plans, such as a Simplified Employee Pension (SEP) or a traditional profit-sharing plan. Specifically, you can fund a Solo 401(k) with a salary deferral of as much as 100% of the first $16,500 (for 2009) of your compensation, just as you could with an ordinary 401(k).

But you also can make an “employer” profit-sharing contribution of up to 25% of compensation or, if you’re a sole proprietor, 20% of your self-employment income (not including the salary deferral).

The maximum contribution limit — combining both the salary deferral and the employer profit-sharing contribution — has gone up to $49,000 in 2009, with an additional “catch up” contribution of $5,500 for those age 50 or older.

Let’s look at an example. Say your self-employment income is $100,000 in 2009. In this case, you could make a 401(k) salary deferral contribution of $16,500, plus contribute 20% of the $83,500 balance, or $16,700. This total of $33,200 is far greater than the $20,000 available with just a traditional profit-sharing or SEP plan.

Bear in mind, however, that, as self-employment income increases, the contribution limit advantage of a Solo 401(k) over SEPs and regular profit-sharing plans is reduced and eventually eliminated. This is because the $49,000 maximum applies to all three — except in the case of taxpayers age 50 or older, where the $5,500 catch-up contribution still gives Solo 401(k)s an advantage over SEPs, which don’t allow this additional amount.

Additional pluses

Another attractive feature of Solo 401(k)s is their flexibility. Because you aren’t committed to contributing a particular amount each year, in bad years you can reduce your contributions if you need to. Additionally, if you have another retirement plan in place, you can likely roll it over to the Solo 401(k) so you have only one plan to manage.

And you can control your investments by choosing self-directed funds with a reputable custodian. You can even hold life insurance, real estate or other nontraditional investments within the plan.

Still another intriguing aspect of Solo 401(k)s is the potential availability of plan loans. Participants can borrow up to 50% of the account balance, up to a maximum of $50,000. Just remember that you must repay the loan with level payments made at least quarterly, based on a market rate of interest, and the interest paid generally won’t be deductible.

Something to consider

Solo 401(k)s have other limits as well. Perhaps the most significant is that you can’t set one up if you have employees who’d be eligible to participate in a “qualified” retirement plan. You’d then need a 401(k) plan that covers them as well. Nonetheless, many self-employed individuals and owners of very small businesses have put these plans to good use in recent years, so they’re absolutely worth considering.