10 days, 10 ways—to lower your 2009 taxes
One of my “Seven Steps to Financial Abundance” is “minimize your taxes.” As 2009 draws to a close, there are several ‘to do” list items to ensure that your 2009 federal and state taxes will be as low as possible.
Let’s look at 10 actions that could lower your 2009 taxes — if you get them done by December 31:
1. New Car Purchase – If you were unable to take advantage of “cash for clunkers,” but are still planning on a new car purchase, do it now. If you buy a new vehicle by December 31st, you can deduct state and local sales taxes from your 2009 federal tax return, regardless of whether you itemize or not. This deduction applies to the first $49,500 of a new car price and phases out for couples earning over $250,000.
2. Capital Loss Deduction – Determine if you have realized any 2009 capital gains in your taxable investment accounts. If so, assuming that the taxable accounts have assets that are valued at less than their purchase price, sell enough of these capital loss assets to have a net realized capital loss of $3,000 in 2009. This $3,000 capital loss will offset other 2009 income.
3. 401(k) and 403(b) Plans – Maximize your 401(k) and 403(b) contributions before year end. In 2009, the maximum tax deductible contribution for each plan is $16,500. If you are over age 50, you may make a “catch up” contribution of $5,500 for a total of $22,000. If it is too late to increase your allocations for 2009, be sure to sign up for the maximum reduction that you can afford in 2010.
4. Roth IRA Conversions – If your modified Adjusted Gross Income (AGI) for 2009 is less than $100,000, you may convert IRA holdings into a Roth IRA. While the AGI limitation will disappear in 2010, if your 2009 income is lower than normal, it may be wise to convert some IRA funds before the end of 2009.
5. IRA Charitable Contributions – For those over age 70½, 2009 is the last year in which you can make direct charitable donations of up to $100,000 from your IRA. If you withdrew this money and then gave it to a charity, your AGI would increase, which could trigger future Medicare premium increases.
6. Charitable Gifts -If you are inclined to help those less fortunate than yourself, charitable giving will help reduce your taxes. Any tangible items that you donate must be in at least “good” condition. Keep a detailed list of the items, their condition and the thrift store value of each item.
7. Set up a Donor Advised Fund – If your charitable gifts are in cash, consider establishing a Donor Advised Fund. You can donate long-term appreciated capital assets to the Donor Advised Fund and receive a deduction for the full value of the asset. Not only will you receive a charitable tax deduction, you will never pay taxes on your capital gains.
8. Defer Income – The self-employed and some small business owners can elect to invoice customers in January, so they don’t have to include this income in 2009. However, this may only be wise if you will be in the same or lower tax bracket in 2010.
9. Adjust Medical Deductions – Since medical deductions are limited to expenses exceeding 7½ % of income, if you have already had high 2009 medical expenses, get any tests, eyeglasses, prescriptions or dental work that you may require during 2009. If your 2009 medical expenses are low, hold off on these expenses (if possible) until 2010.
10. Prepay mortgages and state income taxes – If your mortgage payment is due January 1, paying it by December 31 will allow you to deduct the interest in 2009. Prepaying your state income tax by December 31 will also allow the amount paid to be deducted in 2009.
There are other methods of reducing your 2009 taxes, such as IRA and HSA contributions, that do not require action by December 31. However, the actions listed above must be done by December 31 if you wish them to apply to your 2009 taxes.