Dear Clients and Friends,

The holidays are almost here, and most people would rather be shopping and planning their holiday trips than planning their taxes. But with just a few weeks left before the end of the year this is a great time to take steps that will save you some money on your 2009 and 2010 taxes.

Congress continues to use the federal tax law to raise revenue, stimulate the economy, reform healthcare, create jobs and save the planet. Sometimes it seems that Congress sees the solution to every problem as a modification to the federal tax law.

As the economy struggles to recover from a severe, worldwide recession, Congress must carefully balance tax policy with fiscal responsibility. In an attempt to maintain this delicate balance, Congress has passed tax changes that phase in, phase out, or sunset. Legislators have applied some laws retroactively, while others have been given a delayed effective date.

In this ever-changing environment, it is challenging to stay informed, understand the changes and effectively incorporate these changes into a comprehensive, cohesive tax plan. Yogi Berra was right, “The future ain’t what it used to be.”

To confound matters even more, President Obama has appointed a panel to review the tax code to close loopholes, streamline the law and generate revenue. As the press covers the panel’s recommendations, keep in mind that President Bush appointed a national commission to consider tax reform in 2005. After 10 months of effort, that group’s unanimous recommendation to scrap or restructure many popular deductions drew immediate bipartisan opposition. Neither the president nor Congress ever acted on those recommendations.

Also keep in mind, however, that by all indications President Obama does not intend to extend the tax cuts enacted during the Bush administration. As such, starting in 2011 you should expect to see an increase in both the highest marginal tax rate on ordinary income from 35% to 39.6% and the tax rate on dividends and long-term capital gains from 15% to 20%.

Reading this letter is a start toward planning moves that will assist you in achieving your tax and financial goals. If you have questions about anything in this letter – or even what’s not in this letter – please call! We are committed to working with you to identify the tax strategies that meet your unique needs.

Although we have covered a number of topics in this letter, we undoubtedly did not address every issue relating to your specific situation. Please consult with your tax adviser before implementing any of these tax planning strategies.

Personal Income Tax Strategies

Home buyer credits – The tax credit for first time home buyers has been increased over 2008 limits and extended through April 30, 2010. The $8,000 tax credit applies to first time home purchases after January 1, 2009. A “first-time homebuyer” is an individual who had no ownership interest in a principal residence during the three-year period ending on the date of the purchase.

Unlike last year’s credit, this home buyer tax credit does not have to be repaid if the buyer keeps the home for at least three years. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces your tax liability on a dollar for dollar basis and it is refundable if your tax liability is less than the credit.

Do you already own a home?A new $6,500 home buyer credit could be available to you if you purchase another home. If you (and, if married, your spouse) have owned a home for five consecutive years out of the last eight you may be eligible for this credit if you buy another home after November 6, 2009 and before May 1, 2010.

For example, if you and your spouse are empty nesters who have lived in your home for the past five years, you are potentially eligible for the credit if you “move down” and buy a smaller home. There's no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.

Limits on Both Home Buyer Credits - For homes purchased after November 6, 2009, the credit phases out for single taxpayers with adjusted gross income between $125,000 and $145,000 and for married couples with adjusted gross income between $225,000 and $245,000. Prior to November 7, 2009, the first time home buyer limits on adjusted gross income were $75,000 for singles or $150,000 for joint filers.

Homes costing over $800,000 don’t qualify for either credit if purchased after November 6, 2009 and you cannot buy the home from a lineal ancestor or descendent. Binding contracts signed by April 30, 1010 must close by June 30, 2010. And keep a copy of your signed settlement statement because you will need to attach it to your tax return.

The tax law gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 to claim the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

Sales tax deduction for new car purchase – In an effort to stimulate new car sales, Congress has authorized an income tax deduction for state and local sales or excise taxes. To qualify for the deduction, you must purchase a new vehicle between Feb. 17 and Dec. 31, 2009.

Importantly, the deduction is available even if you don’t itemize. That means the deduction also reduces your adjusted gross income for purposes of determining whether you qualify for other tax breaks.

If your new vehicle is very expensive, the deduction is limited to the portion of the tax attributable to the first $49,500 of the purchase price. To qualify for the full deduction, your modified adjusted gross income cannot exceed $125,000 for singles or $250,000 for married couples. No deduction is available if your modified adjusted gross income is greater than $135,000 for singles or $260,000 on a joint return.

Making work pay – Last year the government was mailing out stimulus checks. This year, it’s offering the Making Work Pay tax credit. For 2009 and 2010, the Making Work Pay tax credit will provide certain workers with a credit of up to $400, or $800 on a joint return. To qualify for the full credit, your modified adjusted gross income must not exceed $75,000 for singles or $150,000 for joint filers. Above those incomes, the credit begins to reduce. If your modified adjusted gross income exceeds $95,000 for singles or $190,000 for joint filers, there is no credit available.

Earlier in the year, the IRS issued new withholding tables reducing workers’ withholding taxes by the maximum available credit. The objective of the lower withholding is to give workers more spending money in their take-home pay. If you do not qualify for the Making Work Pay tax credit, it is possible that your taxes will be under-withheld and you will have to pay more when you file your 2009 return.

Alternative Minimum Tax (AMT) – The insidious AMT remains a thorn in the side of every tax planner. Although you may not clearly understand it, you probably have heard of – or experienced – its dreaded traps. This tax, initially created to ensure high-income taxpayers pay their fair share, has now expanded to encompass middle-income taxpayers. As an alternative tax system, the AMT can negate any number of tax planning steps designed to reduce the regular income tax.

There is no easy way to estimate the impact of the AMT. If you have paid AMT in the past, or you think the AMT might impact you, it’s a good idea to have an experienced tax professional check your tax planning calculations.

Additional Reporting Requirements for Online Gambling Accounts – Individuals are required to file an additional tax form if they have an online gambling account in excess of $10,000 at any time during the year. Please make sure to alert your accountant if you have such an account.

Investment & Retirement Strategies

IRAs and Roth accounts – Do you have an Individual Retirement Arrangement (IRA), a SEP-IRA, a SIMPLE IRA or assets in an employer sponsored retirement plan? There is a new opportunity beginning in 2010 that allows conversions to a Roth IRA regardless of your income level.

During 2009, you cannot execute a Roth conversion if your adjusted gross income exceeds $100,000. But beginning January 1, 2010, the income limitation is removed. For a Roth conversion during 2010, you may either report the gain from conversion in 2010 or have 50% of the conversion amount taxed in 2011 and the rest taxed in 2012.

Why would you want to consider this? Income earned in a Roth account will never be subject to income tax unless it is withdrawn early. In addition, the Roth account is not subject to the required minimum distribution rules that apply when you reach age 70½.

Timing is important if you decide you want to make a conversion to a Roth IRA. Tax is due on conversion and will be based on the fair market value of the investments when converted.

If you are interested in this idea, we should discuss your and your entire family’s financial situation and the estimated tax consequences soon and you may want to contact your financial advisor as well. You and your financial advisor will want to decide the best time in 2010 or a future year to convert -- when market prices are at a low point.

IRA contributions - Everyone with earned income, including alimony, is eligible to contribute to a traditional IRA. If you are not covered by an employer-sponsored retirement plan, you may also have the choice of deducting your contribution to your traditional IRA. At higher income levels, modified adjusted gross income above $65,000 for singles and $109,000 for joint filers, no deduction is allowed, but you can still contribute to a nondeductible IRA.

Many people find the long-term benefits of contributing to a Roth IRA or a Roth 401(k) outweigh the short-term financial benefits of tax-deductible contributions. While Roth contributions are not tax-deductible, none of the income earned in the Roth account will ever be subject to income tax unless there are early distributions

Eligibility to contribute to a Roth IRA depends on the amount of your income. No contribution is allowed if your modified adjusted gross income for 2009 exceeds $120,000 for singles and $176,000 for joint filers. If you are not eligible because your income is too high, you may want to consider a nondeductible IRA that can be converted to a Roth IRA in 2010.

The provision allowing those over age 70½ to make tax-free distributions of up to $100,000 from IRAs to charities is set to expire at the end of 2009. Although you receive no charitable contribution deduction, the distribution is not included in your income. The effect is to bypass the limits on itemized deductions.

Funding your retirement plans – Contributing to a tax-qualified retirement plan can reduce your current tax obligations and help you save for your retirement in a tax-efficient manner. To qualify for a tax deduction in 2009, your retirement plan generally must be in place before the end of the year. Exceptions are IRA and SEP (simplified employee pension) plans, which must be set up by April 15, 2010. Contributions also provide tax deferral on earnings until distributions are made. So the sooner you make the contribution, the sooner your tax-deferred earnings begin. Check your year to date retirement plan deferrals now to make sure you are on track to maximize your contributions. Also, be sure to update your IRA and retirement account beneficiary designations.

The following limits apply:

Tax rate of 0 percent on capital gains and dividends – The maximum rate of tax on qualified dividends and most long-term capital gains is 15 percent. For those whose marginal tax rate does not exceed 15 percent, the tax rate on these special types of income is reduced to 0.If you are single and your taxable income for 2009 is under $33,951, or you are married with taxable income under $67,901, the 0 percent rate applies to you.

Many people with taxable income below these thresholds do not experience the types of income that qualify for the 0 percent rate. And the kiddie tax rules (see next section) prevent your children from qualifying also. However, if you assist aging parents, you might consider gifting appreciated stock to them if they are in the 10 or 15 percent tax brackets. They could then sell the investment and qualify for the 0 percent tax rate on the gain.

Kiddie tax rules – For 2009, all children under age 19 and dependent college students under age 24 will have their unearned income in excess of $1,800 taxed at their parents’ marginal tax rate. Unearned income includes interest, dividends and capital gains.

Shifting investments to a child’s account was once a popular college savings strategy, especially when the child was in a lower tax bracket. Now, a good alternative may be investing in a Section 529 college savings plan, where funds grow tax-free, and subsequent withdrawals are tax-free for qualified secondary education expenses.

Wash sales – If you sell securities at a loss, the wash sale rules disallow the loss if you purchase substantially identical securities within 30 days before or after the loss sale. Do not rely on your broker to alert you to the wash sale rules. Purchases in one account can wipe out losses that you incur in a different account.

Business Tax Strategies

Depreciation – The American Recovery and Reinvestment Act of 2009 extended the expensing and depreciation incentives contained in the Economic Stimulus Act of 2008. Congress may retain these incentives for 2010, but has not done so yet.

Section 179 – Congress extended the $250,000 expensing election limit to qualifying property purchased and placed in service during 2009. As a result, many businesses will receive an immediate tax write-off for the cost of most new and used tangible personal property. If you do not act this year, the limit is reduced by almost one-half in 2010.

The deductible amount may be limited for some larger businesses, however. Companies that purchase more than $800,000 of qualifying property during 2009 have their deduction amount reduced, dollar-for-dollar, for purchases in excess of $800,000. So the deduction is not available to those companies that purchase and place in service more than $1.05 million of qualifying property during 2009.

Businesses that use a fiscal year as their tax accounting year should note that the new deduction limit applies to property purchased and placed in service during tax years beginning in 2008 and 2009.

Bonus depreciation extended through 2009 – Property that does not qualify for an immediate tax write-off under the expensing election (Section 179 above) may qualify for an increased first-year depreciation deduction under bonus depreciation rules, which were also extended for one year by the 2009 tax act. This deduction is equal to 50 percent of the cost of qualifying property purchased and placed in service during 2008 and 2009.

To qualify for bonus depreciation, the property must be new. Used property does not qualify. In addition, the property must either:

· Have an applicable MACRS recovery period of 20 years or less

· Be water utility property or computer software not covered by the Section 197 amortization rules

· Be qualified leasehold improvement property

Businesses that use a fiscal year as their tax accounting year should note that the bonus depreciation rules apply to property purchased and placed in service before Jan. 1, 2010.

No enhanced deductions for buildings and other structures – Buildings and other real estate generally do not qualify for bonus depreciation or the expensing election. However, a cost segregation study may be able to identify qualifying property with shorter depreciation lives within the overall project. Please ask us about assisting you with a cost segregation study for major building projects.

Losses from pass-through entities – Economic pressures are causing many historically profitable businesses to experience operating losses. If you are an owner of a pass-through business entity operating as a partnership, LLC, S corporation or trust, and the business incurs a loss in 2009, you need to plan ahead to be sure you can take advantage of that loss on your personal tax return.

Passive activities – If your business activity is “passive” – generally a rental real estate activity or a business in which you do not materially participate – you may not be able to deduct the loss unless you also have passive income from other activities. For example, a loss from a partnership in which you are a limited partner would be considered a passive activity loss because limited partners are generally not actively involved in the partnership. A nondeductible passive loss is carried forward to future years until fully offset against passive income or until you dispose of your business interest. If you have a substantial passive activity loss, you may wish to consider either disposing of the business interest or acquiring an investment in a passive activity with income.

Basis limitations – Even if you are actively involved in the business, your loss may not be deductible if you do not have “basis.” S corporation shareholders do NOT have basis for loans made directly to the S corporation by third parties, such as a bank, even if guaranteed by the shareholder. Therefore, these loans should be made by the third party to the shareholder instead and then the shareholder should make the loan to the S corporation. These rules are complicated, and you should consult with your tax professional. But if you can take steps prior to the end of the tax year to invest more in the business or restructure your loans, you may be able to deduct the loss on your return.

Work Opportunity Credit expanded for 2009 and 2010– As the economy begins to recover and your business starts to add employees, a tax credit is available equal to 40 percent of the first $6,000 of wages paid to employees in certain target groups. Employees living in GO Zone Counties (including Tuscaloosa County) may qualify for this credit if they were hired between August 25, 2005 and August 28, 2009 and were living in a GO Zone County on August 25, 2005. You should note that the new law expands the work opportunity credit-eligible target groups to include unemployed veterans and disconnected youth. Other credit-eligible groups include disabled veterans, ex-felons, a vocational rehabilitation referral (this includes many hearing and visually impaired employees) and food stamp recipients. This expanded benefit applies to such workers hired in 2009 and 2010. To obtain the non-Go Zone credit, you may need to have new employees pre-qualified by your state labor department within their first 28 days of employment.

Alabama Severance Pay Exemption - Due to the economic downturn, many businesses have adopted downsizing plans or offered incentives for early retirement. An Alabama law exempts the first $25,000 of severance pay (including company-financed unemployment compensation, termination pay, or income from a supplemental income plan) received by an employee, who, as a result of "administrative downsizing" loses his or her job. The law was modified effective March 12, 2009 to require employers to apply for approval to exempt the severance payments. The request must include a complete description of the company's plan for downsizing and should be submitted in advance of the anticipated downsizing. If your organization is considering such a plan and would like our assistance in applying for this approval, please contact us.

Retirement plans for your business – Starting a small business retirement savings plan can be easier than many business people think. What’s more, a retirement plan has significant tax advantages: Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee, and investments in the program grow tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, Simple or other retirement plan to cover the initial setup expenses.

Business succession planning –Now is a great time to review or implement your business plan and your succession plan. A succession plan is a documented road map for partners, heirs and successors to follow in the event of your death, disability or retirement. Many business owners put a great deal of effort into their business plan but give little thought to their exit strategy.

Estate & Gift Tax Planning Strategies

Estate planning– Time is running out for Congress to deal with the federal estate tax this year. The estate tax exemption amount for 2009 is $3.5 million. The estate tax is scheduled to disappear for 2010 and reappear in 2011 with a $1 million exemption. While Congress continues to do nothing, it is important that your estate plan remains flexible. Regardless of any estate tax law changes, you need to review your will and estate plan to make sure it achieves your goals and minimizes taxes. If you have younger children, your will should appoint a guardian in the event of the death of both parents. You certainly do not want the probate court making decisions on your behalf.

Gift tax – The annual gift tax exclusion for 2009 is increased to $13,000 per person. Therefore, if you are married, you can gift up to $26,000 per donee by using the gift-splitting rules without any federal gift tax ramifications. Gifting is a good way to reduce your taxable estate and may be important in a good estate plan.

For example, the combination of the increased annual gift tax exclusion and the first-time home buyer credit may help your children buy their first home. If your child is married, you and your spouse can give the young couple $52,000 without exceeding your annual gift tax exclusion. Assuming you act in time for the kids to close on a home by May 1, 2010 and they qualify for the $8,000 first-time home buyer credit, they will have $60,000 for a down payment on a first home. If you need help on how to do this properly, please call us.

Conclusion

Tax planning is not just a year-end fire drill. Now is a great time to evaluate your 2009 and 2010 taxes and take measured steps to reduce your tax bill and help achieve your financial goals.

ANY TAX ADVICE CONTAINED HEREIN WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY THE TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER. THIS DISCLOSURE IS REQUIRED BY CIRCULAR 230 ISSUED BY THE U.S. TREASURY DEPARTMENT.