Now is the time when tax planning can really make a difference. By using one or more of the strategies outlined below, you can slash your tax bill by hundreds or even thousands of dollars! Please call me if you have any questions or need any additional information on your specific situation.
1. You can game the standard deduction. If your 2009 itemized deduction totals are just slightly below the standard deduction, you should consider either accelerating deductions to this year or delaying deductions to 2010. The goal is to itemize one year and take the standard deduction in the next. Property taxes are the easiest to control. Paying 2009 taxes in January 2010 and 2010 taxes in December 2010 allows a double deduction in 2010. If you can also make your contributions and medical deductions in 2009 rather than 2010 you will decrease your tax liability for the two years combined. This is a little complicated, so please feel free to call us if you need additional explanation on how this may affect you.
2. If you are facing an underpayment penalty, increase your federal withholding in December from your paycheck or retirement plan is an easy way to avoid penalties.
3. Be careful buying a mutual fund this time of year. If the fund pays a dividend in 2009 after you buy it, you owe tax on the distribution this year and the price will decrease by a corresponding amount. In effect, you are paying income taxes on gains you didn’t receive.
4. Prepay property taxes. If you expect to make less income in 2009, consider accelerating your deduction by paying your property taxes in December rather than in January.
5. Fund your HSA for the year. With a Health Savings Account you can contribute up to $3,000 for 2009 ($5,950 for family coverage) if you have a high-deductible health insurance plan with a catch-up contribution of $1,000. Later distributions to pay health costs are tax free. A new IRS ruling says a participant can still contribute the maximum amount allowed for 2009 as long as the contribution is made by April 15, 2010. However, they must remain HSA eligible in 2010 or you will owe tax plus a 10% penalty.
6. Minimize Kiddie-Tax complications. Under the Kiddie tax rules, unearned income exceeding $1,900 is taxed at the parents’ top tax rate. This applies to a child under the age of 19, or 24 if a full time student. Look at ways to keep the child’s unearned income (interest, dividends, stock sales, etc.) as low as possible.
7. Offset capital gains and losses. Gains and losses from the sales of securities cancel out each other. In addition, you can use any excess loss to shelter up to $3,000 of ordinary income (salary, interest, etc.) from taxes. If you are showing a net capital loss for the year, consider selling any capital assets that you may have a gain on. Similarly, you can realize a loss to absorb capital gain from a sale earlier in the year.
8. Postpone tax on real estate gains. If you sell an investment real estate at a gain before the end of the year you will have to pay the income taxes on your 2009 return in just a few months. Careful planning will allow you to delay the tax. Structure an installment sale where you receive one payment in 2009 and the rest in January 2010 or later. Not only do you postpone a part of the tax, the overall tax may be reduced by reducing your top tax rate.
9. Lock in extra mortgage interest. Prepay your January mortgage payment in December thus increasing your interest deduction.
10. Enroll and pay early for the spring semester. If you will qualify for a deduction or a credit for higher education expenses, consider paying the tuition costs for your children in December, even if the amount isn’t due until January or later.
11. Deduct sales taxes on a new vehicle even if you do not itemize. For 2009, you can deduct the sales tax on up to $49,500 of the cost of a new vehicle. This is set to expire by 12/31/09 and most likely will not be extended.
12. Donate to qualified charities securities or other property that have appreciated in value. Generally, you can deduct the fair market value of donated property that you have owned at least a year. Be sure to obtain an independent appraisal of the fair market value.