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9 Year End Tax Moves to Make by Dec. 31st

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1040 Bobblehead DudeAfter last week’s Thursday post on adjusting your tax withholding, I thought that we needed a full blown post on the best year end tax moves. So who better to turn to than prolific tax expert Kay Bell, author of The Truth About Paying Fewer Taxes? She was kind enough to list not one, not two, but nine tax moves you can make before the ball drops.

It’s time to make your year-end tax list and check it twice to ensure that you give yourself the gift of tax-savings. Here are 9 ways this month to help make your 2009 tax bill as small as possible.

1. Buy a house

Sure, the extension and expansion of the homebuyer credit offers some more time to buy a home, and realistically, if you’re just starting to look you won’t move in until 2010. But with interest rates at historic lows it’s a good idea to start the process.

Qualifying first-time home buyers, as well as move-up (or, as they’re also called, long-time resident) purchasers can get a tax credit.

First-timers, as defined by the IRS, can claim up to $8,000. Folks who’ve lived in their home for five of the eight years before buying another principal residence can claim up to $6,500.

Even if you don’t close on the property until the extended deadline of April 30, 2010, or June 30 of next year if you have a contract in place by the end of April, you can choose to claim the credit on either your 2009 or 2010 return.

2. Improve your current home

If you’re quite happy where you are, Uncle Sam might help you pay for energy-efficient improvements to your current home.

The American Recovery and Reinvestment Act of 2009, aka the stimulus bill, that became law in February, expanded and simplified tax breaks for many residential energy upgrades.

Basically, improvements ranging from the replacement windows and doors to new heating or air conditioning systems could get you up to $1,500 in tax credits. If you decide you want even more efficient upgrades, such as a solar heating system, could you’ll get even bigger tax breaks.

The Energy Star website tracks qualifying improvements and tax credit requirements

3. Make early home-related payments

If you already own a house, you know it offers lots of tax breaks. But you can accelerate those tax write-offs if they’d do you more good this tax year.

Pay your property taxes by Dec. 31 and you can count them as a deduction on your Schedule A. Even if you don’t itemize, this still works. Homeowners who claim the standard deduction can add up to $500 in property taxes to that standard amount. Joint filers get to claim up to $1,000.

Similarly, pay your January mortgage payment this month and you’ll be able to deduct that extra loan interest amount, too.

4. Buy a car

Another tax break created by the stimulus package is the deduction for sales taxes paid on a new car.

If you bought a new vehicle, be it a car, light truck, motorcycle or even a motor home, on Feb. 17 or later, you can deduct the sales tax amount regardless of whether you itemize or claim the standard deduction.

Remember, though, that if your new vehicle costs more than $49,500 you can only claim the tax amount on the value up to that threshold price. The deduction also phases out for higher-income auto buyers: $125,000 for single taxpayers and $250,000 for married joint filers.

If you buy certain hybrids, you also might be able to claim a tax credit for that vehicle. This tax break is no longer available for some of the more popular Toyota and Honda autos, but some credit is still available for qualifying Ford, GM, Nissan and Mazda hybrids. Check with your auto dealer and the IRS announcements on the various manufacturer credits.

5. Sell some assets

If some of your holdings lost value in 2009, sell them by the end of the year and use the loss amount as a deduction. It first must be offset any gains you had, but excess losses up to $3,000 can be used to reduce your ordinary income so that there will be less for Uncle Sam to tax. If you have more than three grand in losses, first find a new investment advisor, then keep track of the losses as you can continue to use them up each tax year in $3,000 increments until the losses are exhausted.

What if you have gains? Although the lower capital gains rates are scheduled to remain in effect through 2010, some folks fear that the huge federal deficit might prompt Congress to up the rates sooner. If you’re worried about that, you might want to take your gains now while you’re assured they’ll be taxed at, for most folks, 15 percent.

6. Get charitable

Contribute to your favorite charity by Dec. 31 and claim the gift amount on that year’s tax return. Your gift can be cash (which in the eyes of the IRS includes credit card charges) or goods.

Many charities also will accept appreciated securities. This might be worth considering if you own a stock that’s gained value but no longer fits your investment plan. By giving it directly to the charity of your choice, the nonprofit can sell it if it wishes and use the funds for whatever projects it deems worthy. And you get to deduct the asset’s value as a charitable gift and not owe any capital gains taxes on the appreciation.

And regardless of how you choose to give to your favorite charity, be sure you get a receipt.

7. Manage your medical expenses

If you have a lot of medical expenses, you might be able to deduct them as an itemized expense on Schedule A. The key is having enough to exceed 7.5 percent of your adjusted gross income. If you’re close, you might want to schedule medical procedures that could get you over this limit.

An easier tax-advantaged medical consideration is your flexible spending account. If you still have money in this workplace account, make sure you use it up before you lose it. That happens in most cases at the end of the benefit year which, for many, is also the end of the calendar year. Some companies allow you a grace period until March 15 to spend up your FSA funds. Check with your company to see which deadline you need to meet. You definitely don’t want to overlook the use-it-or-lose it date.

8. Bunch your deductions

The miscellaneous expenses deduction offers a great way to write off some unrelated expenses. The only problem is that these expenses must exceed 2 percent of adjusted gross income before you can claim them. You still have about a month to look at what’s deductible here and, if you’re close to clearing the threshold, spending on things such as work-related publications, costs to manage your expenses and even what your pay your tax pro (or pay for a software tax prep package) to get over this deduction hurdle.

Don’t forget job hunting expenses. If you lost your job and looked for a new one in the same field, or got a jump on the job hunt just in case, those expenses can be counted, too.

9. Adjust your withholding

If you’re a person who intentionally gets a big refund each filing season, stop it! You’re giving Uncle Sam an interest-free loan when you probably could make better use of your money.

Head to your payroll office now and adjust your withholding so that you pay as closely as possible what your eventual IRS bill will be.

You also might need to file a new W-4 if you discover you’ll have to pay back part of your Making Work Pay credit. This tax break starting appearing in paycheck in April, again as part of the stimulus. But some folks, such as married couples where each spouse works or dependent children, got more credit than they should have. These folks will have to pay it back when they file, unless they make some adjustment now

The IRS has an online withholding calculator to help you gauge how the credit might affect your tax bill and just what your withholding should be.

Do all of these year-end tax moves apply to you? Probably not. But I suspect that at least a few do and that you can take some time before December ends to make the tax moves that will shave a few dollars off your 2009 IRS bill.

Freelance writer Kay Bell is Contributing Tax Editor for Bankrate.com. She also writes two tax blogs, Bankrate’s Eye on the IRS, and Don’t Mess With Taxes, and is the author of the book “The Truth About Paying Fewer Taxes.”

(Photo: brianjmatis)

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16 Responses to “9 Year End Tax Moves to Make by Dec. 31st”

  1. “If you have a lot of medical expenses, you might be able to deduct them as an itemized expense on Schedule A. The key is having enough to exceed 7.5 percent of your adjusted gross income. If you’re close, you might want to schedule medical procedures that could get you over this limit.”

    To clarify the point, you can only deduct the amount in excess of 7.5% of AGI. That is to say, if your AGI is $100,000 and your medical expenses are $7501, you can deduct $1, not the entire $7501.

    But if you’re at $7000 on December 2 and can schedule a $5000 expense before year end, it makes sense, because you’d get a $4500 deduction [(7000+5000)-7500 = 4500]

    • stonewall says:

      To comment further, some states such as Arizona allow you to deduct all medical expenses regardless of the federal AGI limitations.

  2. Chris says:

    Thanks for the details kosmo.

  3. jsbrendog says:

    sigh, I am in a limbo middle stage where none of these aply to me….although that could also be a good thing right now…

  4. lostAnnfound says:

    “Similarly, pay your January mortgage payment this month and you’ll be able to deduct that extra loan interest amount, too.”

    I don’t quite understand the benefit on this one. If I pay January’s payment in December, then next year, assuming I do the same thing, I will still have made 12 payments for that year and for each year after that. It seems like the only benefit is realized the first year you do it when you would have made payments from January to December and then paid the following January’s bill also in December, so 13 payments would have been made at that point.

    Or am I totally missing something regarding this?

    • Jim says:

      You’re not missing something, what you said is 100% accurate. It’s not a huge benefit, but it’s something worth doing simply because it’s easy.

      • stonewall says:

        The strategy is to accelerate a deduction in a year where you are in a higher tax bracket. It’s a temporary fix, but if you are in the 28% bracket in ’09 vs a 15% bracket in ’10, then you’ll see a nice chunk of savings.

        • JoeTaxpayer says:

          Another point – if you are on the edge of taking the standard deduction and itemizing, this pull-in can be part of your itemized in odd years, and the 11 payment years fall into the years you take the standard deduction. Same thought towards stacking donations in JAN and DEC of the year to itemize.

    • steve says:

      By making an extra payment each year, you can also pay off your mortgage 7 years earlier on a 30 year mortgage.

      • lostAnnfound says:

        Thanks for the explanation. Making an extra payment makes sense in terms of paying off a mortgage early, it was just figuring out how making a payment early was actually beneficial in terms of taxes.

  5. Paige says:

    We have never been able to itemize, even with owning a home. So owning a home is not a big tax benefit for us.

  6. Izalot says:

    Hey Fallout Bobble-head boy! Could he be a miscellaneous deduction for your blog?

  7. Kay says:

    Thanks for the opportunity and for the comments from the readers!

  8. JoeTaxpayer says:

    Kay – remember too, that this year congress extended the “donate from your IRA” for those 70-1/2 and older. Even with the suspended RMDs, for those who don’t itemize, they are still better off (in most cases) donating from the IRA instead of with ‘regular’ money.
    Joe

    • Anonymous says:

      Kay – remember too, that this year congress extended the “donate from your IRA” for those 70-1/2 and older. Even with suspended RMDs, for those who don’t itemize they are still better off (in most cases) donating from the IRA instead of with ‘regular’ money.
      Joe


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