Year-end tax planning

Last week I attended an annual conference reviewing major developments in federal and California tax laws and procedures. For a variety of reasons, these are among the most sweeping in memory, and will probably affect all of you in some fashion. When you throw in the effects of the recession and uncertainties surrounding proposed health care legislation, tax planning is more critical this year than ever.

Some highlights:

• Both the IRS and the state of California made changes to the withholding tables in 2009. As a consequence, many of you will end up with smaller refunds or actually owe money this coming April.
• Increased tax benefits and credits are available for education expenses and investments in solar and energy-saving improvements.
• Taxes on COBRA and unemployment benefits have increased
• California is offering a new small business hiring credit.

Normally, it is considered good practice to push income into the new year and take deductions early (the reasoning being that taxes deferred are taxes saved). This strategy may no longer be operative given the near-certainty that federal and state rates will be increasing over the next several years.

Also, job changes (including severance packages, unemployment benefits, pay cuts and early retirement), foreclosures and investment losses present a new set of challenges. We need to make sure your tax bill is minimized for each of these circumstances.

For most taxpayers with salary income reported on form W2, recalibrating withholding exemptions will be necessary to avoid unpleasant surprises. If you fall into any of the following categories, you may want to consider adjusting your withholding allowances:

• have children or other dependents;
• have more than one job;
• are married and you both work;
• received a COBRA subsidy;
• receive a pension where taxes are withheld;
• have or expect to have total income over $1 million;
• owed taxes when you filed last year’s return and did not change your withholding at that time; and/or
• got married, divorced or became widowed this year.

Even if your financial picture is particularly dire, a short tax planning session now could save a tax bill and penalties next year.

My offer of a free no-obligation half-hour appointment to review your tax situation and current professional needs still stands. Contact me by email or telephone to make your appointment before December 31.