Tax Changes in 2009

Several key tax changes became effective over the holiday season. Some, like the increase in estate tax exemption and increase in retirement plan contribution limits, we have known will happen for some time. But some were included in newly passed legislation signed into law by President Bush late in December.

Among the noteworthy changes for 2009:

Required Minimum Distributions Suspended

In 2009 taxpayers over 70 ½ who have been required to make distributions from their IRAs and other qualified plans will not be forced to do so in 2009. This could be significant for people who have adequate assets to live off of outside of their IRAs. For 2009, at least, those people won’t have to take withdrawals from accounts that have seen their values drop steeply.

Retirement Plan Contributions

Employees can contribute $16,500 in 2009, up from $15,500 in 2008. Employees over age 50 can put in a ‘catch-up’ contribution of up to $5,500 for a total of $22,000 in 2009, up from $20,500.

IRA contribution limits for both regular and Roth IRAs remain at $5,000 ($6,000 if over age 50). IRA contribution limits will be indexed in future years, but only in $500 increments when the CPI mandates an increase.

Mileage Rate

The standard mileage rate for deducting business travel is 55 cents per mile, which is down from the 58.5 cents in place for the last half of 2008 but up from the 50.5 cents in the first half of last year. The rate for medical or moving expenses moves to 24 cents per mile in 2009. The rate for driving on behalf of charitable organization remains at 14 cents per mile – this rate is set by law, not by the IRS.

Estate Tax Exemption

The basic estate tax exemption climbs to $3.5 million in 2009, up from $2 million in 2008. So a married couple, with proper planning, can transfer $3.5 million each to their heirs ($7 million total) free of estate tax if they die in 2009.

This change was part of a 2001 tax law which raised the exemption amount from then until now, then eliminates the estate tax altogether in 2010, THEN brings it back in 2011 and drops the exemption back to the pre-2001 $1 million level.