Individuals who are self-employed may want to consider setting up a 401(k) plan before the end of the year. Many brokers and financial institutions offer solo 401(k) plans for self-employed people. Unlike a SEP-IRA, solo 401(k) plans can potentially provide for larger tax-deductible savings contributions. The term "solo 401(k)" is used to describe retirement plans that cover only sole proprietors who file a Schedule C, owner-operators of LLCs, and shareholder-employees of C- or S-corporations; solo 401(k) plans are not designed to provide coverage for small businesses with employees who are not owners.

Like SEP-IRAs, a solo 401(k) can be funded retroactively by filing deadline (April 15th for Schedule C or LLCs; March 15th for corporations). And like SEP-IRAs, funding for 401(k) plans can be extended (to September or October 15th). This is one reason why I really like SEPs and 401(k)s, as it gives both the tax professional and the client flexibility in making last-minute tax decisions, plus an opportunity to shift deductions to an earlier year.

401(k) plans do differ from SEP-IRAs in how the contribution level is calculated. For 2009, the maximum funding levels will look like this: Read more...

For 2010, the maximum amount that can be contributed to health savings accounts are:

• $3,050 for self-only coverage,
• $6,150 for family coverage,
• $1,000 in additional catch-up contributions for people age 55 or older.

The annual maximums are adjusted annually by the IRS as part of their inflation-indexing process (Rev Proc 2009-29). The additional catch-up amount for people age 55 or older is set by statute in Internal Revenue Code Section 223. This additional catch-up amount reached its full $1,000 amount in 2009, and so the catch-up amount will not increase further unless Congress changes the law.

I also wish to point out two interesting things I noticed about HSAs recently. Normally funds inside an HSA cannot be used to pay for insurance premiums. Except: HSA funds can be used to pay for

• COBRA premiums,
• health insurance premiums during any period for which you're receiving unemployment benefits, or
• health insurance premiums if you're age 65 or older (other than Medigap and other Medicare supplemental policies).

So for people who are currently unemployed, you might be able to tap into your health savings account to help pay for your health insurance coverage.

The second thing I recently noticed about health savings accounts: no where do the rules say you need "earned income" to be eligible for an HSA. In other words, even "unearned income" such as interest, capital gains, or unemployment benefits can be offset by using the HSA deduction. (Earned income is a technical phrase meaning income from wages or self-employment.)

Students who pay tuition and other college-related expenses this year for classes beginning early next year can take the deduction or tax credit for those expenses this year. The rule is that if a class begins within the first three months of next year, you can take a deduction or tax credit if those expenses are paid this year.

Undergraduate students have a major new tax break to consider: the American Opportunity tax credit. Unlike the Hope credit that it temporarily replaces for 2009 and 2010, the American Opportunity credit is available for the first four-years of college education, is worth up to $2,500 in tax credits on the first $4,000 of expenses, and up to 40% of the credit is refundable -- meaning it can generate a tax refund in excess of what you paid in through withholding. Also, the cost of books, software, and other college education expenses can be included when calculating this credit.

While 2009 is the first year for the American Opportunity credit, 2009 will be the last year for the tuition deduction. This deduction is not limited to undergraduate courses. Thus graduate students, people taking undergraduate classes beyond four-years, and people taking occasional classes will take to review the tuition deduction versus the Lifetime Learning tax credit. Both the tuition deduction and Lifetime Learning credit are based only on tuition expenses.

The House of Representatives passed an estate tax bill (H.R. 4154) that permanently retains the estate tax rates and exemption levels. The bill now goes to the Senate for debate. My colleague Julie Garber has posted an excellent summary of the House bill on the Wills & Estate Planning site. There's also an in-depth write-up from CCH in one of their legislative tax briefings.

Unless Congress changes the law this year, the estate tax will expire for one year only in 2010, and resurface in 2011 with a lower exemption amount and a higher top tax rates. Here's an overview of the current state of the federal estate taxes.

The crucial question may be if the Senate can get to this before the year ends. Kay Bell describes this time crunch as follows, "Any bill passed by that body must be reconciled with the just-passed House measure and then that voted on before it can be signed into law by the President."