Deduction timing is an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status.  A few tips to remember when planning for deductions are provided below.

Deduction Timing:  If you are a cash-method taxpayer, remember to keep the following in mind.  An expense is only deductible in the year in which it is actually paid.  Date checks before the end of the year and mail them before January 1, 2010.  A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2009, you can take the deduction even though you won't pay your credit card bill until 2010.

AGI Limits:  The AGI limits on itemized deductions affect deduction planning. Normally, overall itemized deductions are reduced by 3% of the AGI exceeding $166,800 ($83,400 if married filing separately). For 2009, the reduction is reduced by two-thirds of what it otherwise would be. For 2010, the overall limitation on itemized deductions is terminated. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses.

Standard Deduction Planning:  Deduction planning is also affected by the standard deduction. For 2009 returns, the standard deduction is $11,400 for married taxpayers filing jointly, $5,700 for single taxpayers, $8,350 for heads of households, and $5,700 for married taxpayers filing separately. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year.  For 2009, taxpayers who do not itemize their deductions can deduct up to $1,000 if filing jointly or up to $500 for single taxpayers for real property taxes. This benefit is in the form of an additional standard deduction. If by the end of 2009, you purchase an eligible motor vehicle and have an AGI below a threshold amount, the sales tax paid on the vehicle (up to a purchase price of $49,500) can be deducted as part of your standard deduction.

State Taxes:  If you anticipate a state income tax liability for 2009 and plan to make an estimated payment, consider making the payment before the end of 2009. Note that in 2009 (but not in 2010), you can elect to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.

Please contact one of our tax professionals if you have any questions regarding deduction planning.