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Taxes - 2010 Lessons from your 2009 Tax Return

Last Updated Apr 11, 2010 6:52 PM EDT

As April 15 approaches, MoneyWatch is publishing daily tax tips. See the full list here, and please check back frequently for the latest advice from our experts.
2010 taxes are dependent upon what you do today. Since your 2009 return is done (or at least underway), see if it can teach you how to save a bundle next year. Here are some things to look for and what to do to lower your 2010 tax bill.

Taxable interest: line 8A - If you have substantial taxable interest, you may be paying taxes needlessly. To lower your taxable interest, just locate your assets in the most tax efficient manner. You want to hold your stocks and stock index funds in your taxable account and your CDs or taxable bonds in your IRAs or 401Ks. So consider selling your stocks in your tax-deferred accounts and buying CDs and bonds instead. Then buy the same amount of stocks or stock index funds in your taxable account with money in your CDs and bonds. You'll own the same assets but be guaranteed to pay lower taxes.

Tax exempt interest: line 8b - Do you have much tax exempt interest from muni bonds? You may be chasing the wrong goal. The goal should be to earn more after taxes than just to lower taxes. Similar to the paragraph above, you don't want to own muni bonds unless you've maxed out your taxable bonds in your tax deferred accounts. You'd be better off without these muni bonds and earning higher rates on taxable bonds in your tax-deferred accounts.

Capital gains: line 13 - Have you been hit with capital gains? Does your schedule D show much in the way of short-term gains taxed at the highest rates? Trading stocks or owning mutual funds that trade stocks actively generate gains that cost you at tax time. Not only does active trading lead to lower returns, it also leads to higher taxes. Consider owning broad stock index funds like a total US stock market or total international stock market index. They generate little capital gains until you sell the fund. This puts you in control.

Itemized deductions: line 40A - Are your itemized deductions only a few thousand dollars above the standard deduction ($5,700 single and $11,400 joint)? This means you may not be getting much benefit from you mortgage. If you paid $5,000 in mortgage interest but only had itemized deductions of $13,000, you only got a deduction on $1,600 of that interest. Add to that the fact that mortgage rates are higher than what you can earn on risk free bonds, and you are probably better off paying down or paying off your mortgage.

Other lessons - Other opportunities to earn more after tax dollars range from timing sales to avoid AMT to holding off on a sale to get the lower long-term capital gains tax rate.

Bottom line
Investing would be so much easier if it weren't for our complex tax code. As a CPA for the last 30 years, I'll freely admit I don't understand the tax code. But since real tax reform seems far away, the best I can advise is to play the game. Some of the suggestions above will help lower your tax bill and, much more importantly, increase you after-tax dollars.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.