Neil Brown, a certified financial planner at Burkett Financial Services in West Columbia, has spent much of the year working with a mother of two end her cycle of living paycheck-to paycheck for a series in The State. Brown offers some year-end tax advice.
Doing some year-end tax planning could be productive this year so you can nail down a host of tax breaks that might not be around next year unless Congress extends them.
- The option to deduct state and local sales and use taxes instead of state income taxes.
- The standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles.
- Deduction for qualified higher education expenses.
- Tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes.
- A 50 percent bonus first year depreciation for most new machinery, equipment and software and an extraordinarily high $250,000 expensing limitation.
- Alternative minimum tax exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won't be available to offset the AMT.
- Top tax rates on ordinary income could increase after 2010, making long-term deferral of income less appealing.
- Long-term capital gains rates could go up as well, so it may pay for some to take large profits this year instead of a few years down the road.
- However, next year there no longer will be an income based reduction of most itemized deductions, nor will there be a phaseout of personal exemption under current law which is subject to change.
- Traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer's income.
WHAT ELSE TO CONSIDER
FSA: Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year. Don't forget that you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
Stock losses: Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
Postpone income: Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income. These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, deductions for higher-education expenses, and deductions for student loan interest.
Postponing income can help taxpayers who anticipate being in a lower tax bracket next year because of changed financial circumstances. However, in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
Pay now: Consider using a credit card to prepay expenses that can generate deductions for this year.
Buy now: Accelerate big ticket purchases into 2009 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction.
Increase withholding: If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2010.
Bunch up: You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
Energy miser: If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and qualify for a tax credit. Additional, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.