No one wants to think about taxes now (or anytime, for that matter). But doing so well before year-end can put some money back in your pocket. That's because some key moves that could slash your 2009 (and 2010) taxes can take weeks to pull off. And one tax break will expire in December. So get out the aspirin, a sharp pencil, and a calculator and begin taking these 10 tax-saving steps. (To rough out your 2009 tax bill, use the online tax-estimator calculator at the H&R Block site.)
1. Add Up Your Miscellaneous Deductions
You want to see if they'll add up to more than 2 percent of your 2009 adjusted gross income (AGI), the threshold to claim any of them. These deductions include job-search expenses, unreimbursed employee business expenses, and fees for tax and investment advice. If you're close to or over 2 percent, hunt for more expenses to pay before the year is up. Or if you're borderline, try lowering your AGI to reach the threshold by accelerating deductions from 2010 into 2009 or postponing receiving some 2009 income until January.
2. Dump Losers to Offset Winners
It's never wise to sell an investment purely for a short-term tax benefit. But if you're holding depressed stocks, bonds, or funds that you were planning to unload, sell the losers by December 31. Use the losses first to offset any realized 2009 investment gains. You can take a further deduction, of up to $3,000, against your income. Any additional losses can be carried over to 2010. Just remember that you can't recognize the loss if you buy the same or a substantially identical security within 30 days before or after the sale. MoneyWatch blogger Charlie Farrell has written about this in detail. In some cases, you might also sell a stock or mutual fund you own and like if it's showing a big loss. You won't need to wait 30 days to replace it, as long as you replace it with one that's not exactly the same - such as swapping a large-cap fund with an S&P 500 index fund. "In the process of doing this, you'll reduce your cost of owning the asset," says MoneyWatch editor-at-large Jill Schlesinger, a certified financial planner. If you've already taken losses this year, you might sell winners with an equal amount of unrealized gains (up to $3,000) and then escape taxes on those gains. And, in this case, you can then buy similar securities after the sale without needing to wait 30 days, so your only cost is a brokerage commission.
3. Buy a New Car
If you're thinking about getting new wheels, it pays to pay for them by December 31 before a special tax break expires. Normally, itemizers can deduct their state and local income taxes or sales taxes, not both. Buy a new vehicle between February 17, 2009 and December 31, 2009, however, and you can write off the amount of the state and local sales taxes and excise taxes on up to $49,500 of the purchase price. New motorcycles and light trucks qualify, too. This deduction isn't available if your modified adjusted gross income exceeds $260,000 and you file jointly or $135,000 and you're single, however. As with miscellaneous deductions, if your income is on the cusp for this break, try lowering your 2009 income by accelerating 2010 deductions into this year or pushing 2009 income into next year. The IRS actually has a useful video about car taxes, along with other tax videos, on its YouTube channel.
4. Make Your (Job-Related) Move
You can claim 2009 write-offs for your unreimbursed expenses to move for a new job if you incur them before year's end, even if you haven't found employment by January 1. Deductible costs include hiring a mover and the cost of driving to the new location. You'll need to pass the "distance" test and the "time" test. This means you'll have to work full-time in your new location for at least 39 weeks in the 12-month period after the move (or at least 78 weeks in the 24 months after the move if you're self-employed). And the new job must be at least 50 miles farther from your old home than your previous job location was. If you take the write-off and later find you didn't meet the thresholds, amend the return.
5. Hunt for Job-Hunting Deductions
If you meet the rule to claim miscellaneous deductions and are looking for work, rev up spending on the effort. Just remember that the expenses must be for a new job in your previous line of work. They include: job-agency and career-counselor fees; resumes; postage for mailing applications; ads in newspapers and magazines and on Web sites; and unreimbursed travel and hotel costs for interviews. You can take these write-offs even if you're still working full-time and don't leave that job.
6. Get Points for Closing on a House
By finalizing a home purchase by year's end, you'll be able to take a 2009 itemized deduction for any points you pay. They're considered interest and each point equals 1 percent of your loan amount. You'll also get this break if you pay points before January to build or improve your primary home. Schlesinger says paying points can make sense if you plan to keep the house at least beyond the "break-even point" - what you get by dividing the cost of the point by the monthly payment savings for paying it. If one point equals $1,000 and reduces your payment by $15, the breakeven point is just over 66 months ($1,000 divided by 15). So it's worth it to pay a point if you'll stay more than five and a half years or so. "To compensate for lost interest on your money from paying the point, however, I'd recommend adding another year onto the breakeven," says Schlesinger.
Here, too, you'll lower your 2009 taxes by writing off the points - as long as you're taking out the cash from the refinanced loan to improve your home. Just watch your debt load and don't pull out more money than you really need. (The last time lots of people mistook houses for ATMs it didn't work out so well.) If you refinance just for a lower rate, you must claim the points over the loan's full term.
Look out for this common mistake: If you refinanced your mortgage previously to benefit from lower rates and paid points then, refinancing now for any reason means you can claim on your 2009 return whatever's left of those remaining points. Many borrowers forget to deduct these points because they don't show up on the closing papers at a new refinancing. Typically, several thousand dollars fall right through the cracks.
8. Watch That Rental Income
You're allowed to rent out your vacation home and pocket the rent checks without declaring the rental income if - an that's a big if - you had a tenant for fewer than 15 days. Exceed the limit and all the rental income becomes taxable. So check the calendar before you collect any more rent on your second home. (The IRS's Publication 527 lays out the complete rules about vacation-home rental income and taxes.)
9. Pay Your Kids to Work for Your Family Business
Hiring them, rather than paying allowances, shifts income out of your higher tax bracket and into their lower bracket. Have them perform legitimate clerical duties or make deliveries, for example. Make sure you pay reasonable wages - not more than the going rate for unrelated employees.
10. Take Advantage of Income Splitting
You may be able to lower taxes on your family's investment income for 2009 and beyond by transferring ownership of appreciated mutual fund shares or stocks to your kid before January. If your child has taxable income under $33,950, he'll be in the zero-percent tax bracket for capital gains and dividends as long as his 2009 investment income is under $1,900. You might make a similar transfer to your elderly parents. Joint filers with taxable income under $67,900 are in the zero bracket for investment income.
Julian Block is an attorney and author specializing in taxes based in Larchmont, N.Y.