Once December 31st has come and gone, your tax liability for the 2009 tax year will be set in stone. Until then, and especially now that your final tax picture for 2009 is becoming more clear, year-end tax planning presents a unique last chance to lower your tax bill. It is an investment in time well worth considering.

Tax law changes. Year-end tax planning is made more urgent in 2009 because of some significant tax law changes. In February, Congress passed the American Reinvestment and Recovery Act of 2009 (2009 Recovery Act), providing for a first-time homebuyer credit of 10 percent of the purchase price (up to $8,000) and enhanced net operating loss (NOL) carryback rules for certain small businesses. Both these benefits were extended and enhanced when, this November, Congress passed the Worker, Homeownership and Business Assistance Act of 2009.

With the Worker, Homeownership and Business Assistance Act now in place, the homebuyer credit is available to qualified taxpayers purchasing principal residences on or before April 30, 2010. If a taxpayer enters into a binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the new law treats the credit as not expiring until July 1, 2010.

The Worker, Homeownership and Business Assistance Act also provides a reduced credit for "long-time homeowners." Individuals who have owned and used the same residence as their principal residence for any five consecutive year period during the eight year period ending on the date of the purchase of a subsequent principal residence may be eligible for a reduced credit of $6,500 ($3,250 for married couples filing separately). Both credit opportunities carry an adjusted gross income ceiling, which itself can be subject to a "prior year" election. Year-end tax planning can help those close to this income line qualify in certain instances.

For businesses, the Worker, Homeownership and Business Assistance Act enhances the ability to carry back NOLs. All businesses, and not just qualified small businesses, may be eligible to elect to carry back applicable NOLs and obtain immediate cash refunds. An applicable NOL is the taxpayer's NOL for a tax year ending after December 31, 2007 and beginning before January 1, 2010. There are special rules for small businesses and for carryback offsets in the "fifth year." Many variables factor into taking this benefit, with some of them able to be changed by year-end tax planning before 2009 NOLs are set in stone.

Besides these incentives, a large number of other tax breaks are temporary and, therefore, enhance the urgency of year-end tax planning. For individuals, the expiring provisions include the itemized state and local sales tax deduction, the higher education tuition deduction; the additional standard deduction for real property taxes; and the above-the-line teachers' classroom expense deduction. For businesses, bonus depreciation and enhanced "section 179 expensing," both designed to temporarily encourage business to make capital investments, will expire after December 31, 2009 unless Congress extends them.

Looking ahead. What is on the horizon, for 2010 and beyond, is also crucial to effective year-end tax planning this year. In 2010, the opportunity to convert any IRA into a Roth IRA without the long-time $100,000 income restriction has many individuals already setting aside funds. Some individuals, however, may do better to convert to a Roth IRA before the end of 2009, when the ...click here for more...