2009 Tax Changes

Here are some of the tax changes that will impact you during 2009 tax filing. Consider them early on to offset any issues you may have.

IRS - Federal
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2009 Federal Income Tax Brackets

How to Calculate Your Tax Liability

Before we highlight the changes, let’s take a moment to show you how to calculate your Federal income tax liability so that you can better understand how tax brackets work. Let’s look at the following example, suppose your taxable income (after deductions and exemptions) is exactly $100,000 in 2009 and your status is Single; then your tax would be calculated like this:

(	$8,350 minus	$0 )	x 10% =	$835.00
(	$33,950 minus	$8,350 )	x 15% =	$3,840.00
(	$82,250 minus	$33,950 )	x 25% =	$12,075.00
(	$100,000 minus	$82,250 )	x 28% =	$4970.00
	Total:	$ 21,720.00

The $100,000 taxable income puts you in the 28% tax bracket, since that’s the highest rate applied to any of your income; but your effective tax rate as a percentage of $100,000 is 21.72%. Comparing 2008 tax rates, you are paying $258 less tax in 2009 for the same income.

Standard Deductions

The basic standard deduction for joint filers for the 2009 tax year will be $11,400, up from $10,900 for 2008. For singles, the amount for 2009 will be $5,700, up from $5,450. For the 2009 tax year, most taxpayers will lose part of their itemized deductions if their adjusted gross income exceeds $166,800, up from $159,950 in 2008.

Retirement savings

The maximum amount that someone under age 50 can contribute to a 401(k) plan for 2009 rose to $16,500 from $15,500. Those 50 or older can put away an additional $5,500 this year, for a total of $22,000, up from $20,500.

Social Security taxes

The maximum amount of earnings subject to Social Security taxes rose to $106,800, up from $102,000 in 2008.

Mileage rates

This may not directly impact you, as your company pays you for the official/business travel. Taxpayers who use their vehicles for work can deduct their actual costs or rely on the IRS's optional standard mileage rate of 55 cents a mile for 2009. The rate was 58.5 cents in the second half of 2008 and 50.5 cents in the first half.

Gift Tax Exclusion

Professor Young believes that that gift tax exclusion amount will increase from $12,000 to $13,000. Right now, if you give more than $12,000 a year to someone as a gift, you have to pay a gift tax on it (yes, the giver of the gift pays the tax). Professor Young believes that number will increase to $13,000

Earned Income Tax Credit

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 (up $204). The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646 (up $1,769)

IRA

No change from 2008. You can contribute upto $5000 per year if you are less than 50 years, and $6000 if you above 50 years

What you can do?

Tax Diversify

What is Tax Diversification?

Tax diversification is the strategy of spreading your investments out across each of the different types of accounts:

1. Taxable accounts
2. Tax-deferred accounts (i.e., traditional IRAs, 401(k) accounts, or 403(b) accounts)
3. Tax-free accounts (i.e., Roth IRAs or Roth options within a 401(k) account)

When deciding between tax-deferred accounts or tax-free accounts, you’re answering the question “Do I want to be taxed on this now, or would I rather be taxed on this later?” In its simplest form, the decision comes down to how your current tax bracket compares to the tax bracket you expect to be in when you withdraw the money.

• If you expect to be in a higher tax bracket in retirement, it makes sense to put the money in a tax-free account (like a Roth IRA).
• If you expect to be in a lower tax bracket in retirement, it makes sense to put the money in a tax-deferred account (like a traditional IRA).

Two Reasons It Pays to Tax Diversify

The first and most obvious reason for tax diversifying is that it’s impossible to know precisely what your tax rate will be in retirement, especially if retirement is still many years away. Based on current tax rates you may be able to say that your retirement tax bracket will be lower than your current one. But who’s to say that tax rates won’t change?

By spreading your investments across both tax-deferred and tax-free accounts, you can minimize the risk that you’ll be caught off guard by a significant change in tax rates. The second reason it pays to tax diversify is simple math: Putting all of your investments in either tax-free accounts or tax-deferred accounts is unlikely to be the most tax-efficient strategy.

For example, imagine an extreme scenario in which an investor has all of his retirement savings in a Roth IRA. Once he retires, none of his withdrawals would be taxable. At first glance, this may sound wonderful, but it’s really a huge waste.

If the investor had forgone some of his Roth contributions in order to contribute to a 401(k) or traditional IRA, he would have increased his taxable income in his low tax bracket years in exchange for reducing his taxable income during his high tax bracket years. That sounds like a good trade-off to me.

How to Tax Diversify

Because of all the variables involved, there’s no way to know precisely which breakdown of tax-deferred, tax-free, and taxable accounts is best. The strategy I suggest for most investors is to allocate their investment dollars in the following order:

1. Take full advantage of your employer’s 401(k) match,
2. Max out your Roth IRA,
3. Go back to your 401(k) and max it out,
4. Invest in taxable accounts.

This way you’ll be taking advantage of your employer-provided match, taking advantage of the low-cost investment options in an IRA (as compared to the high-cost funds frequently offered in a 401k), and achieving tax diversification all at once.

CALIFORNIA TAXES

2009 California Tax Rate Schedules

Schedule Y — Married/RDP filing jointly, or qualifying widow(er) with dependent child

If the taxable income is
Over	But not over	Tax is			Of amount over
$0	$14,120	$0.00	Plus	1.25%	$0
$14,120	$33,478	$176.50	Plus	2.25%	$14,120
$33,478	$52,838	$612.06	Plus	4.25%	$33,478
$52,838	$73,350	$1,434.86	Plus	6.25%	$52,838
$73,350	$92,698	$2,716.86	Plus	8.25%	$73,350
$92,698	And over	$4,313.07	Plus	9.55%	$92,698

If the taxable income is
Over	But not over	Tax is			Of amount over
$0	$7,060	$0.00	Plus	1.25%	$0
$7,060	$16,739	$88.25	Plus	2.25%	$7,060
$16,739	$26,419	$306.03	Plus	4.25%	$16,739
$26,419	$36,675	$717.43	Plus	6.25%	$26,419
$36,675	$46,349	$1,358.43	Plus	8.25%	$36,675
$46,349	And over	$2,156.54	Plus	9.55%	$46,349

Individual tax rates

• The maximum rate for individuals is 9.55%
• The AMT rate for individuals is 7.25%

Exemption credits

Filing Status/Qualification	Exemption amount
Married/Registered Domestic Partner (RDP) filing jointly or qualifying widow(er)	$196
Single, married/RDP filing separately, or head of household	$98
Dependent	$98

Phaseout of exemption credits

Higher-income taxpayers' exemption credits are reduced as follows:

Filing status	Reduce each credit by:	For each:	Federal AGI exceeds:
Single	$6	$2,500	$160,739
Married/RDP filing separately	$6	$1,250	$160,739
Head of household	$6	$2,500	$241,113
Married/RDP filing jointly	$12	$2,500	$321,483

Standard deductions

The standard deduction amounts for:

Filing status	Deduction amount
Single or married/RDP filing separately	$3,637
Married/RDP filing jointly, head of household, or qualifying widow(er)	$7,274
The minimum standard deduction for dependents	$950

Reduction in itemized deductions

Itemized deductions must be reduced by the lesser of 6% of the excess of the taxpayer's federal AGI over the threshold amount or 80% of the amount of itemized deductions otherwise allowed for the taxable year.

Filing status	AGI threshold
Single or married/RDP filing separately	$160,739
Head of household	$241,113
Married/RDP filing jointly or qualifying widow(er)	$321,483

AMT exemption

Filing status	Amount
Married/RDP filing jointly or qualifying widow(er)	$78,817
Single or head of household	$59,114
Married/RDP filing separately, estates, or trusts	$39,407

AMT exemption phaseout

Filing status	Amount
Married/RDP filing jointly or qualifying widow(er)	$295,564
Single or head of household	$221,674
Married/RDP filing separately, estates, or trusts	$147,781

Disclaimer: This is based on compilations from various web sites including but not limited to blogs, internet searches, IRS and CA FTB sites. If any one has objection, please let me know and I would be more than happy to remove the corresponding contents.