photo: Edwin Dalorzo
Another year is almost in the books, but that doesn’t mean that it’s too late to implement some smart tax deduction strategies. With some smart planning, you can lower your realized income and lower your 2008 tax bill (or increase your return). But you must act quick, as your time is almost up.
Invest in your Future:
It may or may not be too late to bump up additional contributions for your 401k in 2008, however, you can make a deductible contribution to a traditional IRA up until the 2008 filing deadline (April 15, 2009) for the 2008 tax year. The IRS maximum allowed limit for 401k’s and traditional IRA’s is $15,500 and $5,000, respectively, in 2008. The limit goes up to $16,500 for 401k’s, while IRA’s stay at $5,000 in 2009.
Sell Losing Investments:
Let’s face it, this was one of the worst years ever to be in the stock market. If you are investing in a taxable account, at least there is somewhat of a silver lining that comes with painful investment losses – a tax deduction. First, you must subtract your losses from any capital gains you’ve made. Next, additional losses can offset up to $3,000 of your 2008 ordinary income.
Do you have even more losses? Investment losses above and beyond what you used to offset your capital gains and ordinary income can be carried over into future tax years. Who knows? You may even be able to offset all those capital gains that will come when the market rebounds. Before implementing investment loss strategy by selling mutual funds, make sure that you won’t incur any penalty for holding shares for too short of a period of time.
Take Advantage of Short-Term Laws:
You may be able to capture tax-free profits without selling losing investments, thanks to a temporary new tax law that allows people in the two lowest income-tax brackets to pay nothing on long-term capital gains in 2008. The 0% capital-gains rate applies to married couples with taxable incomes of $65,100 or less; single heads of households with taxable incomes of $43,650 or less; and individuals with taxable incomes of $32,550 or less.
Donate to a 501(c)(3):
Tax deductions for charitable donations can be claimed for the year in which the donation is made. Perhaps it’s time to rummage through your house to find valuables you no longer need or want that others can gain value from. You may obtain fair market value on these items. Or, simply open your checkbook or donate cash.
When submitting your donation, ask for and keep all of the appropriate documentation and receipts associated with all donations so that you are safe in the event of a possible future tax audit. If you are donating goods, document a description of everything given.
Prepay your Mortgage:
If you’re a homeowner, you may want to consider making your January mortgage payment in December, which will give you one more month of interest to deduct. Check with your mortgage provider to see if an early payment is possible.
Get Healthy on your Medical Bills:
If you have have large and predictable medical and/or dental bills that need to be paid, consider making all the payments before the year is over. The IRS allows families to itemize and deduct medical and dental expenses that exceed 7.5% of their adjusted gross income, so if you’re close to going over that percentage it may be wise to pay the bills to be able to make the deduction.
Get A Jump Start on 2009!
Tax planning is much easier when you know much you’ve spent, donated, and earned — but that’s traditionally required collecting receipts in shoeboxes all year. Now, you can use online personal finance services like Mint.com, which automatically categorizes your transactions and allows you to tag expenses and income as tax related. Download your transactions to a spreadsheet and send it to your accountant. If you’re doing your own taxes, this info plus your end-of-year paycheck will give you a big head start in using online tax software. Check out TaxAct. It offers federal filing free, and you can file federal and state for less than $14. If your early calculations show that you’re due a refund, file asap. And review your deductions to avoid withholding too much from your paycheck next year.
For more of GE Miller’s writing, see 20somethingfinance.com.