The revised tax brackets will let taxpayers earn more money this year without bumping themselves up to a higher tax rate. The new brackets mean you will pay less tax on higher income than you would have in 2008. The timing could not be better says Investor Business Daily.
With the market up strongly, a lot of taxpayers could rack up capital gains this year versus 2008’s losses. Even the economy is heating up; so some taxpayers may earn more this year thanks to everything from year-end bonuses to Roth IRA conversions and withdrawals from the traditional IRAs. In both cases, income from gains or job earnings, savvy moves may help you avoid taxes or reduce your taxes.
Each year, the brackets are adjusted for inflation. For example, the upper limit for the 25% bracket for couples filing jointly went from $131,450 in 2008 to $137,050 in 2009. That is an increase of 4.26%. Those numbers are for taxable income, after deductions from gross income. If you know where you stand you may be able to make some tax efficient moves by year end.
Take a hypothetical James Darren. His modified adjusted gross income (MAGI) will be under $100,000 in 2009. Since that is the income ceiling on eligibility for converting a traditional IRA to a Roth IRA, he can make the switch. Darren, who is single projects his taxable income for this year at $60,000 and that puts him in a 25% federal tax bracket.
That bracket goes up to $82,250 of taxable income in 2009, so Darren is under the ceiling by $22,250. So Darren converts $22.250 of his traditional IRA to a Roth IRA by year end. He will stay in the 25% tax bracket and he will owe the IRS only $5,562.50 on the conversion, which is 25% of the $22,250.
If Darren thinks his tax rate in the future will be higher, converting to a Roth IRA will be a good choice. After five (5) years and after age 59 ½ all withdrawals from the Roth IRA will be tax-free. Another opportunity might arise for Ann and Adam Anderson, a hypothetical retired couple. They’re tapping their traditional IRAs for living expenses to supplement Social Security. The Andersons project their 2009 taxable income at $50,000, so they are in the 15% tax bracket. That goes up to $67,900 in 2009.
The couple can take a total of $17,900 from one or both of their IRAs by year end. As long as they keep their joint taxable income no higher than $67,900 for the year, they will owe the IRS only 15% on these IRA withdrawals. The Andersons are both in their 60s, so they are in no danger of triggering the 10% penalty for a withdrawal from a traditional Ira before age 59 ½. Any penalty would be in addition to the income tax the Andersons would have to pay, but there are some exceptions to the 10% penalty.
You can avoid the penalty if the distributions are equal and at least annual, said Tom Ochsenschlager, Vice President of taxation at the American Institute of Certified Public Accountants. The IRS permits several methods of making this calculation, based on your age. Ochsenschlager said, you have the opportunity to change the amount of the withdrawal, at whichever is later:
Five years from when withdrawals began, or
When you reach 59 ½.
Arranging capital gains to fill up a tax bracket this year may be especially appealing, as long as you stay in a 10% or 15% bracket, you will owe no tax on gains in 2009 or 2010 from assets held more than one year. The 0% rate on long-term gains applies if your taxable income is no more than $33,950 this year or $67,900 on a joint return. If your income will be higher, shifting gains to a low bracket loved one can pay off big time.
Say Bob Smith holds appreciated stocks he plans to sell. Smith’s 24 year old son, Jake, is in school and expects $12,000 in taxable income in 2009 from his part time job. The Smiths can give Jake $26,000 in stock. That would use the $13,000 gift tax exclusion amount from Bob Smith and the $13,000 gift tax exclusion amount from Mrs. Smith. Now say the stock cost the Smiths $10,000. Jake sells the stock in 2009 and realizes a $16,000 long term capital gain. Now he has $28,000 in taxable income for the year of 2009. Jake, as a single taxpayer, can have up to $33,950 and stay in the 15% bracket and owe no tax on the long-term capital gains. In fact, the Smith’s son would have to take another $5,950 of long term gains before he would owe tax on any of the gains.
Similar strategies can work with gifts to an elderly parent or parents. Watch out for income shifts to children under the age of 24. Stay away from that transaction because if they are full time students, low taxed investment income is basically capped at $1,900 for 2009.
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This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for ways to save taxes, avoid audits and remain invisible to the IRS, call us at 702-642-8953 or write us at isueirs@aol.com. With us there are No exceptions, No conditions. No time limits. No IRS.
