SHIFTING INCOME AND DEDUCTIONS INTO THE MOST ADVANTAGEOUS YEAR

You can shift taxable income between 2009 and 2010 by controlling the receipt of income and the payment of deductions. Generally, income should be received in the year with the lower marginal tax rate, while deductible expenses should be paid in the year with the higher marginal rate. If your top tax rate is the same in 2009 and 2010, deferring income into 2010 and accelerating deductions into 2009 will generally produce a tax deferral of up to one year. On the other hand, if you expect your tax rate to be higher in 2010, you may want to accelerate income into 2009 and defer deductions to 2010.

Planning Suggestion: You should consider the time value of money when making a decision to defer income or accelerate deductions. Comparative computations should be made to determine and evaluate the net after-tax result of these financial actions.

Moreover, you should consider whether you expect to be subject to the alternative minimum tax (“AMT”) for either or both years.

CONTROLLING INCOME

Income can be accelerated into 2009 or deferred to 2010 by controlling the receipt of various types of income depending on your situation, such as:

FOR BUSINESS OWNERS

• Year-end interest or dividend payments from closely-held corporations;

• Rents and fees for services (delay December billings to defer income); and

• Commissions (close sales in January to defer income).

CAUTION: Income cannot be deferred to 2010 if you constructively receive it in 2009. Constructive receipt occurs when you have the right to receive payment or have received a check for payment even though it has not been deposited. Income also cannot be deferred if you effectively receive the benefit of the income; for example, if you are allowed to pledge a deferred compensation account balance to obtain a loan.

Bonuses for work performed in a particular year can be deferred to the next year if an election is made no later than the end of the year preceding the year the work is to be performed. Accordingly, bonuses for work to be performed in 2010 can be deferred to 2011 if the required election is made before the end of 2009.

FOR INVESTORS

• Interest on short-term investments, such as Treasury bills (“T-bills”) and certain certificates of deposit that do not permit early withdrawal of the interest without a substantial penalty, is not taxable until maturity.

Example: In November 2009, an investor buys a six-month T-bill. The interest is not taxable until 2010 assuming the T-bill is held to maturity.

• Interest on U.S. Series EE savings bonds

Other than not being taxable until the proceeds are received, interest on issued Series EE bonds may be exempt from tax if the proceeds of the bond are used to pay certain educational expenses for yourself or your dependents, and the requirements of “qualified United States savings bonds” are met.

2009 Federal Income Tax Rates

Planning Suggestion: Consider investments that generate interest exempt from the regular income tax. You must, however, compare the tax-exempt yield with the after-tax yield on taxable securities to determine the most advantageous investment. In addition, some tax-exempt interest may be subject to AMT, which could lower the tax-exempt yield.

Other ways to defer income include installment sales and tax-free exchanges of “like-kind” investment or business property.

Planning Suggestion: If you made a 2009 sale that is eligible for installment reporting, you have until the due date of your 2009 return, including extensions, to decide if you do not want to use the installment method and, instead, report the entire gain in 2009.

FOR EMPLOYEES

• Year-end bonuses and deferred compensation

CAUTION: The Service will scrutinize deferrals of income between owner-employees and their closely-held corporations. Also, any deferred compensation arrangements must be entered into before the compensation is earned. Additionally, if you own more than 50 percent of a taxable (C) corporation or any stock of an S corporation that reports on an accrual method of accounting, the corporation can deduct a year-end bonus to you only when it is paid.

Planning Suggestion: The tax rate for the Medicare Hospital Insurance portion of the social security tax is:

• 1.45 percent for employees

• 1.45 percent for employers

• 2.9 percent for self-employed individuals

This tax is imposed on all employee compensation and self-employed income, including vested deferred compensation, without any limitation or cap. If you are a shareholder in an S corporation, you might be able to reduce the Medicare tax by reducing your salary. However, reasonable compensation must be paid to S corporation shareholders for services rendered to the S corporation.

• Distributions from retirement plans

Distributions from qualified retirement plans can be delayed

CAUTION: Penalties may be imposed on early, late, or insufficient distributions.

• IRA distributions

Distributions from individual retirement accounts (“IRAs”) can be delayed until age 70½ (see page 8). If you have not reached age 59½ and need to take a distribution from your IRA to pay medical expenses, the ten-percent early withdrawal penalty does not apply to the portion of those medical expenses in excess of 7½ percent of your AGI. However, you will have to pay regular income tax on the entire distribution. If you have been unemployed and received unemployment compensation for at least 12 weeks before age 59½, distributions used to pay any health insurance premiums are not subject to the ten-percent penalty.

If you are planning to purchase a new home, you may withdraw up to $10,000 from your IRA to pay certain qualified acquisition expenses without having to pay the ten-percent early withdrawal penalty. The distribution is still subject to the regular income tax. The $10,000 withdrawal is a lifetime cap. If a taxpayer or spouse has owned a principal residence in the previous two years, this penalty-free provision is not available. An eligible homebuyer for this purpose can be the owner of the IRA, his or her spouse, child, grandchild, or any ancestor. Also, penalty-free distributions can be made from IRAs for higher education expenses of a taxpayer, spouse, child, or grandchild.

• Accelerated insurance benefits

Subject to certain requirements, payments received under a life insurance policy of an individual who is terminally or chronically ill are excluded from gross income. If you sell a life insurance policy to a viatical settlement provider (regularly engaged in the business of purchasing or taking assignments of life insurance policies), these payments also are excluded from gross income.

• Educational expense exclusion

An exclusion for employer-provided education benefits for nongraduate and graduate courses up to $5,250 per year is available.

Planning Suggestion: If you wish to take university courses, speak with your employer about paying up to $5,250 of the tuition per year as part of your compensation package.

You may also be eligible for an “above-the-line” deduction (deductible in arriving at AGI, regardless of whether you itemize or use the standard deduction) of up to $4,000 for higher education expenses if your AGI does not exceed $65,000 (or $130,000 if filing a joint return). If your AGI is greater than $65,000 (or $130,000 on a joint return), but does not exceed $80,000 (or $160,000 if filing a joint return), your maximum tuition and fees deduction will be $2,000. Once your AGI exceeds $80,000 (or $160,000 on a joint return), a deduction will not be allowed. The $4,000 limit must be reduced for those higher education expenses that are not subject to tax, i.e., United States Government interest used to pay higher education expenses; distributions from state tuition programs (section 529 plans); or distributions from educational IRA plans. The “above-the-line” deduction for higher education expenses is not applicable for taxable years beginning after 2009, unless an extension is enacted into law.

• Educators’ Out-of-Pocket Classroom Expenses in 2009.

Eligible educators can deduct $250 (subject to various limitations) of their classroom expenses as above-the-line deductions. These are expenses that would otherwise be allowable as trade or business deductions. The balance of the educators’ classroom expenses is deductible as an unreimbursed employee business expense, a miscellaneous itemized deduction subject to the two-percent-of-AGI floor. This provision is available for taxable years beginning before January 1, 2010.

• Damages received for non-physical injuries and punitive damages

All amounts received as punitive damages and damages attributable to non-physical injuries are gross income in the year received. Legal fees attributable to non-business income or to employment related unlawful discrimination lawsuits are a reduction of gross income, instead of a miscellaneous itemized deduction. Damages received by a spouse, which are attributable to loss of consortium due to physical injuries of the other spouse, are excluded from income.

CONTROLLING DEDUCTIONS

Itemized deductions, other than investment interest, medical expenses, and casualty or theft losses, are reduced by three percent of the amount by which a taxpayer’s 2009 AGI exceeds $166,800 ($83,400 for married taxpayers filing separately). However, these itemized deductions are not reduced by more than 80 percent of the otherwise allowable deductions. For taxable years beginning in 2009, this reduction of itemized deductions is limited to one-third of the otherwise applicable reduction. This means that, in 2009, the reduction is one percent of the excess of total itemized deductions over the specified level instead of three percent (assuming that the 80-percent limitation is not applicable). For 2010 the reduction of itemized deductions is eliminated.

CAUTION: Because this reduction of itemized deductions may increase your 2009 marginal tax rate, any decision to accelerate or defer deductions must consider this possible effect.

Deductions that may be accelerated into 2009 or deferred to 2010 include:

• Charitable contributions (cash or property)

You must obtain written substantiation, in addition to a canceled check, for all charitable donations.

Charities are required to inform you of the amount of your net contribution, where you receive goods or services in excess of $75 in exchange for your contribution.

If the value of contributed property exceeds $5,000, you must obtain a qualified written appraisal (prior to the due date of your tax return, including extensions), except for publicly-traded securities and nonpublicly-traded stock of $10,000 or less.

Planning Suggestion: If you are considering contributing marketable securities to a charity and the securities have declined in value, sell the securities first and then donate the sales proceeds. You will obtain both a capital loss and a charitable contribution deduction.

CAUTION: If you are contemplating the repurchase of the security in the future, you need to consider the wash sale rules discussed on page 6.

On the other hand, if the marketable securities or other long-term capital gain property have appreciated in value, you should contribute the property in kind to the charity. By contributing in kind, you will avoid taxes on the appreciation and receive a charitable contribution deduction for the property’s full fair market value.

If you contribute appreciated, publicly-traded stock (with no restrictions) to a private foundation, you are entitled to a charitable contribution deduction for the full fair market value of the stock.

If you wish to make a significant gift of property to a charitable organization yet retain current income for yourself, a charitable remainder trust may fulfill your needs. A charitable remainder trust is a trust that generates a current charitable deduction for a future contribution to a charity. The trust pays you income annually on the principal in the trust for a specified term or for life. When the term of the trust ends, the trust’s assets are distributed to the designated charity. You obtain a current tax deduction when the trust is funded based on the present value of the assets that will pass to the charity when the trust terminates. This accelerates your deduction into the year the trust is funded, while you retain the income from the assets. This method of making a charitable contribution can work very well with appreciated property.

If you volunteer time to a charity, you cannot deduct the value of your time, but you can deduct your out-of-pocket expenses. If you use your

automobile in connection with performing charitable work, including driving to and from the organization, you can deduct 14 cents per mile (this amount stays the same for 2010). You must keep a record of the miles.

The allowable deduction for donating an automobile (also, a boat and airplane) is significantly reduced. The deduction for a contribution made to a charity, in which the claimed value exceeds $500, will be dependent on the charity’s use of the vehicle. If the charity sells the donated property without having significantly used the vehicle in regularly conducted activities, the taxpayer’s deduction will be limited to the amount of the proceeds from the charity’s sale. In addition, greater substantiation requirements are also imposed on property contributions. For example, a deduction will be disallowed unless the taxpayer receives written acknowledgement from the charity containing detailed information regarding the vehicle donated, as well as specific information regarding a subsequent sale of the property.

• Medical expenses

In addition to medical expenses for doctors, hospitals, prescription medications, and medical insurance premiums, you may be entitled to deduct certain related out-of-pocket expenses such as transportation, lodging (but not meals), and home healthcare expenses. If you use your car for trips to the doctor during 2009, you can deduct 24 cents per mile. Beginning on January 1, 2010, you can deduct 16½ cents per mile. Payments for programs to help you stop smoking and prescription medications to alleviate nicotine withdrawal problems are deductible medical expenses. Uncompensated costs of weight-loss programs and diet food to treat diseases diagnosed by a physician, including obesity, are also deductible medical expenses.

Planning Suggestion: If you pay your medical expenses by credit card, the expense is deductible in the year the expense is charged, not when you pay the credit card company. It is important to remember that prepayments for medical services generally are not deductible until the year when the services are actually rendered. Because medical expenses are deductible only to the extent they exceed 7½ percent of AGI, they should, where possible, be bunched in a year in which they exceed this AGI limit. Medical expenses are not subject to the three-percent-of-AGI reduction.

Under certain conditions, if you provide more than ten percent of an individual’s support, such as a dependent parent, you can deduct the unreimbursed medical expenses you pay for that individual to the extent all medical expenses exceed 7½ percent of your AGI. Even if you cannot claim that individual as your dependent because his or her gross income is $3,500 or more, you are still entitled to the medical deduction. Please contact us for details. At the time of publication, the United States Congress was considering healthcare legislation that might affect the medical expense deduction. Please contact us to determine the impact of any enacted healthcare legislation on the medical expense deduction.

• Long-term care insurance and services

Premiums you pay on a qualified long-term care insurance policy are deductible as a medical expense. The maximum amount of your deduction is determined by your age. The following table sets forth the deductible limits for 2009:

These limitations are per person, not per return. Thus, a married couple over 70 years old has a combined maximum deduction of $7,960, subject to the normal limitation on medical expenses of 7½ percent of AGI.

Generally, if your employer pays these premiums, they are not taxable income to you. However, if this benefit is provided as part of a flexible spending account or cafeteria plan arrangement, the premiums are taxable to you. The deduction for health and long-term care insurance premiums paid by a self-employed individual is covered in the box on page 10, “Tax Tips for the Self-Employed.”

Medical payments for qualified long-term care services prescribed by a licensed healthcare professional for a chronically ill individual are also deductible as medical expenses.

• General sales and use tax

For taxable years beginning before 2010, taxpayers may elect to take state and local general sales and use taxes as an itemized deduction, rather than state and local income tax. Taxpayers utilizing this election have the option of deducting actual sales and use taxes paid or using IRS-published tables and then adding the sales tax paid on any “big ticket” item purchases (motor vehicle, boat, aircraft, home).

• Property taxes, mortgage interest, and points

Interest as well as points paid on a loan to purchase or improve a principal residence is generally deductible in the year paid. The mortgage loan must be secured by your principal residence. Points paid in connection with refinancing an existing mortgage are not deductible currently but rather must be amortized over the life of the new mortgage. However, if the mortgage is refinanced again, the unamortized points on the old mortgage can be deducted in full.

• Interest paid on qualified education loans

An “above-the-line” deduction (a deduction to arrive at AGI) is allowed for interest paid on qualified education loans. The maximum deduction is $2,500. All student loan interest up to the $2,500 annual limit is deductible. However, in 2009 this deduction is phased out for single individuals with modified AGI of $60,000 to $75,000 ($120,000 to $150,000 for joint returns).

CAUTION: Interest paid to a relative or to an entity (such as a corporation or trust) controlled by you or a relative does not qualify for the deduction.

• Non-business bad debts

Non-business bad debts are treated as short-term capital losses when they become totally worthless. To establish worthlessness, you must demonstrate there is no reasonable prospect of recovering the debt. This might include documenting the efforts you made to collect the debt, including correspondence to the debtor to demand payment.

• 401(k) plan contributions

If your employer (including a tax-exempt organization) has a section 401(k) plan, consider making elective contributions up to the maximum amount of $16,500 or $22,000 if over age 50, especially if you are unable to make contributions to an IRA. You should also consider making after-tax, nondeductible contributions to a 401(k) plan if the plan allows, as future earnings on those contributions will grow tax-deferred. A nondeductible contribution to a Roth IRA can also be considered.

Planning Suggestion: If you are a participant in an employer’s qualified plan (which includes a 401(k) plan) and are at least 50 years old, you can elect to make a deductible “catch-up” contribution of $5,500 to the plan. To make a “catch-up” contribution, your employer’s plan must be amended to allow such contributions.

• IRA deductions

The total allowable annual deduction for IRAs is $5,000, subject to certain AGI limitations if you are an “active participant” in a qualified retirement plan. An IRA deduction of up to $5,000 can be made for a non-working spouse, provided the working spouse has at least $8,000 of earned income. A catch-up provision for individuals age 50 or older applies to increase the deductible limit for IRAs to $6,000.

Planning Suggestion: Consider making your full IRA contribution early in the year so that income earned on the contribution can accumulate tax-free for the entire year.

Planning Suggestion: If money is tight, consider the use of credit cards to make tax deductible year-end payments. However, interest paid to a credit card company is not deductible because it is personal interest.

CAUTION: If you choose to accelerate income into 2009 or defer deductions to 2010, make sure your estimated tax payments and withheld taxes are sufficient to avoid 2009 estimated tax penalties.