Photo: Mike Fillion
With only two weeks left in 2009, you might think that it’s time to throw
in the towel on your 2009 taxes. Not so fast! This is the prime time of year
to implement some smart tax deduction strategies. With minimal effort, you
can still have a huge impact on your 2009 tax return by decreasing your
realized income. If any of these strategies appeal to you, speak with a tax
Strategy #1: Fund your Retirement:
You may still be able to add more contributions for your 401k in 2009.
Additionally, you will be able to make tax deductible contributions to a traditional IRA up until the 2009 tax filing deadline (April 15, 2010) for the 2009 tax year. The IRS maximum allowed 401k limit is $16,500 in both 2009 and 2010. For those 50 and over, the catch-up contribution brings you up to $22,000 both years. For IRA’s, the limit is set at $5,000, while the catch-up is $1,000 for both years. Check with your employer ASAP to see if it’s not too late to kick up your contributions.
Strategy #2: Hold Off on the Roth IRA Conversion:
Owners of traditional IRAs can convert all or a part of their accounts to a Roth IRA if their 2009 modified adjusted gross income is under $100,000.
Any amount converted is taxable income, but is thereafter eligible for the
potential tax-free distribution rules of Roth IRA’s. The big news is that
starting in 2010, the $100,000 income threshold is removed – anyone can do a conversion. For 2010 only, you also have the option to spread the income from conversion over the following two years (2011 and 2012). Many have been waiting for this opportunity.
Strategy #3: Sell Losing Investments (and Big Winners):
The S&P 500 index went from the low 900’s to a low of 666 (funny number,
right?) in March, back up to a 2009 high of 1,119. That’s one heck of a
volatile year. All in all, the market is up over 22% for the year. Depending
on when you’ve bought and sold, you might want to consider unloading big
winners to offset your losers, or big losers to offset your winners. First,
you must subtract your losses from any capital gains you’ve made. Next,
additional losses can offset up to $3,000 of your 2009 ordinary income.
Have larger net losses than $3,000? Losses above and beyond what you used to
offset your capital gains and ordinary income can be carried over into
future tax years. 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.
Strategy #4: Capital Gains Tax Cuts:
Under the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005,
US taxpayers in the two lowest tax brackets (10% and 15%) will pay no
capital gains taxes on long-term investments sold in 2009 and 2010.
Long-term capital gains result from profit made via appreciation of a
security (stock, fund, etc.) held for more than one year.
Strategy #5: When you Donate to a 501(c)(3), Everyone Wins:
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.
Donations of $250 or more must come with a written receipt or letter from
the 501(c)(3). 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.
Strategy #6: Prepay your January, 2010 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 from your 2009 taxes. Check with your mortgage provider to see if an
early payment is possible. It may be a great way to offset extra income
windfalls in 2009.
Strategy #7: 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
It won’t affect your 2009 taxes (since it was already deducted), but don’t
forget to use up the rest of your 2009 FSA funds if you are in danger of
losing them in the new year.
Strategy #8: Prepare for 2010:
Using Mint.com to classify all of your deductible expenses in 2010, can allow
you to tag anything as tax related. Download your transactions to a
spreadsheet and send it to your accountant. If you’re doing your own taxes,
this info will give you a big head start in using online tax software, such
as TurboTax, which offers federal
filing free. If you expect that you’re due a hefty refund, file asap, so
that you can get back your return and re-invest it. Also, speak with your
employer about your withholding taxes if you have found that you owe too
much taxes or are getting a large refund.
Using TurboTax’s TaxCaster can help you estimate your tax burden and see the impact of any last-minute deductions.
For more of GE Miller’s writing, visit personal finance blog