Welcome to Don't Mess With Taxes' third annual Year-end Money Moves series. As December's days dwindle, we'll let you know what you still can do to save on your taxes or make money a little extra cash before the year ends.
We start off with, of course, tax tasks you need to tend to by Dec. 31.
The rest of the week, we examine investment, retirement and charitable giving moves, then finish things up with a look some financial housekeeping details.
Some of the strategies cross boundaries. For example, selling assets that have lost value could help lower your tax bill; so does donating to your favorite charity. But we'll talk about those year-end money moves in the upcoming investments and giving postings.
But today it's taxes, the first installment in our 2009 Year-end Money Moves.
Do a draft tax return
I know you once is quite enough when it comes to tax filing, but by filling out a mock return early you could prevent some unwanted tax surprises. Look at how much income you have, any you might still be expecting and the types of earnings you'll be reporting. You might be able to defer some of that income into 2010 in order to keep your 2009 tax liability a bit lower.
Examine your deductions
If you itemize, when you're doing your tax filing dry run take a close look at what you plan to write off. Will a lot of your expenses be wasted? For example, you can only claim medical costs that exceed 7.5 percent of your adjusted gross income (AGI) … for now; a health care reform provision calls for that threshold to go to 10 percent.
This year, though, if you're close to making that deduction cut, schedule some tax-allowable procedures before year's end. And if 7.5 percent is just unattainable, put off medical treatments where you can until 2010 and then look at maximizing those expenses next year so you can count them on that tax return.
Do a similar analysis with any miscellaneous expenses your claim. The threshold there is 2 percent of your AGI.
Prepay home deductions
If you need a few more deductions to reduce your tax bill and you're a homeowner, you've got a couple of options.
Pay the mortgage payment due Jan. 1 before then and write off that interest amount on your Schedule A.
Similarly, pay your real property taxes this month so you can use that amount as a deduction on your 2009 return. If you itemize, you'll get to count the whole amount. But even if you claim the standard deduction, you still can add up to $500 of your property tax payment ($1,000 if you're married filing jointly) to your standard deduction amount .
Prepay college costs
If you (or a dependent child) will be taking college classes that begin by at least sometime in March 2010, pay the tuition and other costs now. That way you can claim them on this year's tax return.
Also check out the new American Opportunity Credit, which for 2009 and 2010 tax years replaces the Hope Credit. The new credit covers costs for the first four years of higher education and is worth up to $2,500 versus the $1,800 that was allowed under the Hope. Even better, a portion of the American Opportunity Credit is refundable, meaning even if you don't owe the IRS anything you could get some cash back.
Do an AMT analysis
Of course, many of these deductions won't do you any good if you're going be subject to the alternative minimum tax, or AMT. Your mock return will give you the heads-up about this costly parallel tax. If you will to pay it for the 2009 tax year, don't waste deductions that won't do you any good.
Pay tuition early
Another provision in the economic stimulus law enhances the American Opportunity Tax Credit (formerly called the Hope credit) for higher education expenses. If you pay a child's college tuition bill in 2009, you may qualify for a maximum credit of $2,500 this year (up from $1,800 for 2008). The credit begins to phase out for MAGI of $80,000 for single filers and $160,000 for joint filers.
Buy a car
If you need a new vehicle, consider buying it by Dec. 31. That way you'll be able to deduct the sales tax on the auto (or SUV or motorcycle or motor home) even if you don't itemize your deductions.
If you're looking to pick up a fuel-efficient hybrid, this tax credit is still around in 2009 and 2010. Unfortunately, the most popular hybrids, those built by Toyota and Honda, are not longer eligible for this tax break. But the other automakers still have some vehicles that qualify for this credit.
Make some financial gifts
These gifts are not of the charitable variety, but instead a way you can reduce your estate's value if it's large enough that it might face the federal estate tax. And yes, I expect the estate tax to continue beyond its scheduled Jan. 1, 2010, expiration date.
For the 2009 and 2010 tax years, you can give up to $13,000 each year, or $26,000 if your spouse also wants to be generous, to as many family members and/or friends you want and not owe any gift tax. Even better for the lucky recipients, they don't owe any tax on the gift amount.
Spend your medical FSA money
You've gotten the tax benefit all year of having flexible spending account (FSA) money taken out of your pay pretax. Don't let it go to waste now. This is a use-it-or-lose-it benefit. Unless your company gives you a grace period to March 15, 2010, to spend down the account, you'll forfeit any cash left in it by the end of your benefit year.
Get organized for filing season
If your financial and tax life is much as it was last year, then this should be easy. Pull out your 2008 return and see what income, investments, expenses, deductions, etc. you claimed last year. This also will be helpful in your mock 2009 tax return run. Then set up folders, or at least a main file, for all the statements you'll be expecting next month.
If you're ready for them, you'll have all your tax documents at your fingertips when you are ready to file for real. And if you know what's coming and it doesn't show up in a timely manner, you'll be able to track it down or get a copy so you can complete your taxes on time.
You are unique
The most important end-of-year tax tip, however, is to know your own personal tax situation. Not every tip will help. In fact, depending on your circumstances some could even increase your tax bottom line. Remember the warning about deductions and the AMT.
So evaluate your tax and financial situations carefully. If you are unsure about whether one of these moves could help you, consider talking with a tax professional so you can make the best move, at year-end and year-round.
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