'Tis the holiday season and your to-do list is too long! But don't forget to spend some time thinking about year-end tax moves that may reduce your 2009 tax bill.
Defer or accelerate income into years when you'll be taxed at the lowest rate. Year-end bonuses, retirement plan distributions, option exercises and pre-tax payroll deductions (such as flexible spending accounts (FSA) and 401(k)s) are good candidates for manipulating income.
Be aware of how year-end moves will affect next year's tax bill. For example, decreasing your adjusted gross income (AGI) in 2009 may increase your AGI next year. Higher AGI could potentially limit the benefit of deductions next year thus increasing your tax bill.
Alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year. Many itemized deductions allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for real estate taxes, state and local income taxes, miscellaneous itemized deductions, and personal exemption deductions.
You may be able to save taxes this year by utilizing a bunching strategy to itemized deductions. Real estate taxes are typically due in January and June each year. If your taxes are not paid through an escrow account by your lender, consider whether or not it would benefit you to make your January payment by December 31st instead.
If you expect to owe state or local taxes when you file your return in April, consider paying those taxes prior to year end to claim the deduction in 2009. Similarly, quarterly estimated payments are due by January 15th of each year. Consider whether it may benefit you to make those payments in December instead.
Consider renewing subscriptions to professional journals, paying union or professional dues, paying financial planning or investment management fees, enrolling in (and paying tuition for) job-related courses, etc., to bunch these miscellaneous items into 2009. Remember that miscellaneous itemized deductions are subject to the 2 percent AGI floor.
If cash is short this time of year, consider using a credit card to prepay expenses that can generate deductions for your family this year.
Make retirement or college savings plan contributions:
You have until April 15th of next year to make contributions to individual retirement plans which may help to defer 2009 income but you must make 529 college savings plan contributions on or prior to December 31st of this year. In Ohio, you can deduct up to $2,000 of contributions per beneficiary on your state income tax return.
Buying and selling investments:
Your investment accounts may provide a number of tax saving opportunities. If your holdings still haven't recovered from 2008 losses or, if you have losses from this year, consider selling those positions to realize the loss for tax purposes. You can immediately reinvest the proceeds of your sale into another security with a similar but slightly different investment goal or you might choose to reinvest the proceeds into the same security in 31 days (so as not to be subject to wash sale rules).
Another opportunity presented by your investment portfolio is that of avoiding December dividend distributions. Since mutual funds do not pay taxes themselves, they pass the tax bill on to shareholders. If you are considering a year-end sale, take action before the ex-dividend date. If you are considering a purchase, take action after the dividend has been doled out to shareholders.
Roth IRA conversions:
If you are in a relatively low tax bracket and you're investing for the long term, consider converting traditional-IRA funds into a Roth IRA if you are eligible to do so. A Roth conversion will increase your adjusted gross income for 2009 in exchange for tax free income during retirement.
Some careful planning can almost always help to reduce your tax bill. The strategies above are widely used and are based on current tax laws. Please consult a qualified tax advisor regarding your own financial circumstances.