Tax-Saving Tactics
Let's face it — 2009 has been hard on the wallet. Between lost jobs, shrunken paychecks and disappearing bonuses it's been a time of more pain, less gain. But the year is not over and there are tax-savvy moves you can still make to pull some financial cheer out of an otherwise dreary 12-month stretch.
Thanks to Washington's largesse, each wave of bad news — whether it's housing's collapse or carnage in the stock market — seems to bring with it another wave of tax benefits. But to reap many of these benefits, you need to act by Dec. 31. That's not only because tax rules change from year to year but also because your income does too, and that means you may qualify for breaks this year but not next.
In some cases, smart tax-planning means taking advantage of tax breaks and deductions that are slated to expire. In other cases, it's taking steps to shift income so you can qualify for income-sensitive tax benefits. "It may be helpful to accelerate some deductions in 2009 when possible" if the deduction is at risk of disappearing in 2010 or if the person's salary may increase next year to the point where the deduction can't be taken, says Ed Smith, a tax partner at BDO Seidman LLP's Boston office.
The strategies can range from tax loss harvesting — where investors sell stocks at a loss and use the loss to offset income or even future gains — to bunching up medical expenses in the remaining weeks of 2009 to qualify for related deductions. In other cases, people might want to shift some money into an IRA with a plan to convert to a Roth IRA next year — when the income limits on such transfers temporarily come off.
There's one more reason to act now: even if Congress doesn't pass new tax legislation, taxes are still going up. Income tax and capital-gains rates are slated to rise in 2011 when TIPRA (the Tax Increase Prevention and Reconciliation Act of 2005), which kept rates low during the Bush years, expires. In 2011, the capital-gains rate will rise to 20% from 15% and income-tax rates on ordinary income will revert back to pre-2001 rates, which max out at 39.6% — up from the current top rate of 35%. The wealthier segment will be hit even harder as certain tax exemptions and itemized deductions will be phased out for those with incomes exceeding $200,000.
See tax moves to make before year's end:
Capture Stock-Market Losses
Donate — and Deduct!
Gather Receipts — They're Precious
Reach for the Medical Deduction
Go Green for Tax Breaks
Prepare to Convert to a Roth IRA