This story has year-end tips for 2009. To get updated advice for 2010, please see 12 Last-Minute Ways to Cut Your 2010 Taxes.
Add one more item to your gift list: tax breaks. Just hurry, you have only a few weeks left to lower your 2009 income tax bill. Here are 12 last-minute tax-saving tips, including tax-loss selling, that can help you increase the size of your tax deductions and credits and lower your taxable income. Some are for everyone; a few are just for the self-employed. You'll be glad you put these year-end tax tips to use when April 15 rolls around.
- Lower Your Taxes: 10 Moves to Make Now
- Tax-loss Harvesting: Lower Your Taxes
- Stock Timing: When to Sell for Tax Losses
- How to Harvest Year-End Tax Losses
- Home Buyer Tax Credit: How To Cash In
- Lower Your Property Taxes
Mail those charitable gift checks now
When you’re scrambling on New Year’s Eve to send checks for charitable contributions or business expenses, you may think that simply writing “Dec. 31” on the check gets you a 2009 write-off. Wrong. You need to mail the payments early enough for the letters to be postmarked by December 31. The IRS won’t care if the checks don’t reach recipients until 2010, though. The rules are similar with American Express, Visa and MasterCard; you’ll qualify for deductions if you authorize charges by year’s end, even if the card issuer doesn’t bill you until 2010. (For store and gasoline cards, however, your deduction is pegged to when you actually pay the bills, not when you charge the purchases.)
Take advantage of the 0 percent capital gains rate
This year, if you’re in the 10 or 15 percent bracket — taxable income below $67,900 for married couples and $33,950 for singles — profits on long-term capital gains (ones owned more than 12 months) won’t be taxed. That’s right: Your capital gains tax rate will be 0 percent. One big caveat: Your capital gains from sales of stocks or funds are added to your income, so they could push you into a higher bracket. For example, a couple with $60,000 in taxable income could only realize $7,900 in capital gains before they’d start paying tax on those gains. Still, this is a great opportunity to harvest some winners — after you sell, you can immediately repurchase the identical securities and boost their cost basis. That will let you reduce potential gains on a future sale.
Don’t make the common investor mistake of thinking that you should hold on to a fallen investment until you “get back to even.” The only good thing about a loser is that by selling it, you can reduce your taxes. Tax-loss selling doesn’t violate the buy-and-hold mantra; simply put the money back to work in a different investment and you’ll still capture any future market gains. Unload the shares anytime through December 31, the last trading day of the year, and claim tax losses on your ’09 return. Ideally, you’ll be able to offset any taxable 2009 gains with the losses, and avoid owing taxes on the winners. If your losses exceed your gains, you can use up to $3,000 of the losses to offset ordinary income, such as salary, and carry into 2010 any unused capital losses.
Avoid getting soaked by a wash sale
When investing after tax-loss selling, keep in mind that the IRS won’t let you deduct the loss if you buy a “substantially identical” investment within 30 days, what’s known as a wash sale. Either buy something a little different, or just allow at least 31 days to elapse between the sale and the repurchase. The wash sale rules also apply when your spouse buys the substantially identical security. Wash sale rules are a little murky with mutual funds, since whether two funds are “substantially identical” can be a judgment call. But if you’re planning to sell an index fund at a loss, don’t run out and buy another fund with the same index.
Give appreciated stock or fund shares to charity
Boost your 2009 deductions and avoid owing taxes on some winners by giving appreciated securities, instead of cash, to charity. You’ll write off the current market value (not just what you paid for the investment) and escape taxes on the accumulated gains. Never give a stock or fund that has lost value to a charity. Instead, sell the investments and donate the proceeds. Then you can deduct the contribution and claim the loss.
Fully fund your 529 plan
Money saved in these programs grows tax-free and withdrawals used to pay for college sidestep taxes, too. Some states even offer a deduction for contributions. You can invest up to $13,000 in 2009 without worrying about incurring a federal gift tax. But if your 529 has lost value, you may want to ...
Close your 529 plan
If last year’s market meltdown caused your 529 plan to be worth substantially less than what you put in, you might consider terminating it by December 31. That way, you’ll be able to write off the loss as a 2009 miscellaneous itemized deduction, assuming you meet two criteria: First, that amount and any other miscellaneous deductions must exceed two percent of your ’09 adjusted gross income and you won’t owe the Alternative Minimum Tax. Be sure to wait at least 61 days before moving money back into a new 529. Otherwise, the IRS might consider the transaction a rollover and disallow the loss.
Use up your flex account
Some employers require employees with flexible spending accounts (pretax dollars that pay out-of-pocket medical and child-care expenses) to forfeit contributions that go unused by December 31. Others allow a grace period until March 15, 2010. If you have cash sitting in the account and your deadline is year-end, spend it so you’ll avoid leaving money on the table.
Installing energy-efficient home improvements, such as windows and doors, by December 31 will qualify you for a tax credit equal to 30 percent of the cost, up to $1,500. There’s another energy credit of 30 percent of the cost (no dollar limit) of installing renewable-energy improvements including solar water heaters and panels. For information on the types of items qualifying for the credits, go to www.energytaxincentives.org.
For the Self-Employed
Taxpayers who run their own businesses have a few extra ways to cut taxes by year’s end.
Project your income
If you’re your own boss, pencil out what you expect your income to be for 2009 and 2010. Entrepreneurs who anticipate being in a higher tax bracket next year should send out invoices immediately for all fourth-quarter work, so they’ll receive the income in 2009. Also delay making tax-deductible business purchases until January, when the write-offs will become more valuable. If you think you’ll bring in less money in 2010, do exactly the reverse.
Make big-ticket purchases for a home office
Buy a computer, printer, or furniture for a business run out of your home office and start using it before January. Then, you’ll be able to write off the entire cost on your ’09 return, rather than having to prorate the depreciation over the lifetime of the purchase. The first-year expensing limit is $250,000 or your business’s 2009 net taxable income, whichever is less. Let’s say you spend $10,000 for computers, copiers and the like. Instead of depreciating the equipment over the normal five years, you can write off the entire $10,000, lowering your taxes by $3,000 if you’re in the 30 percent combined federal and state bracket. The best part: you don’t have to cough up the cash for the full price of the equipment in 2009 to get the deduction; it’s fine to charge the purchases and pay them off in 2010.
Pay your next health insurance premium now
Although employees can only write off medical expenses once the total exceeds 7.5 percent of their income, the self-employed get a much better tax deal. They can deduct 100 percent of medical insurance premiums for themselves, their spouses and dependents, up to the total of their business’s net earnings. So write that insurance check before January. The 100 percent write-off doesn’t apply to newly minted self-employed people who are buying COBRA coverage through their former employers’ group plans. But if you lost your job in 2009, your income may be low enough this year to meet the 7.5 percent threshold allowing you to write off COBRA costs.
Julian Block is an attorney and author specializing in taxes based in Larchmont, N.Y.
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