There’s plenty to distract you from financial planning this time of year, from cheering on your favorite football team to daydreaming about Thanksgiving dinner. But you don’t want to let some end-of-year deadlines slip by without taking steps to minimize taxes and maximize savings. Especially in this economic climate, a little extra cash can go a long way.
And there’s more cash on the table than usual this year. The government’s stimulus package is loaded with incentives to motivate people to make certain big-ticket purchases — but the deals will run out soon.
So if you were thinking of buying a car or appliance, it might make sense to move those purchases up a few months. In terms of the savings, “it’s now or never,” says Bob Meighan, vice president of TurboTax.
DVR the game, and take a bit of time to make these moves now. You’ll start 2010 with more to be thankful for.
Snag tax breaks
If you’re in the market for — or have already bought — a car or a home, don’t miss these tax incentives courtesy of the stimulus package.
New-car sales tax deduction. You can deduct state and local sales tax paid on a new set of wheels purchased this year (between Feb. 17 and Dec. 31), regardless of whether you itemize. The deduction is limited to the first $49,500 of a vehicle’s price, and the break begins to phase out for singles with modified adjusted gross income of $125,000, or couples with $250,000. If you buy and register a 2010 Honda Accord in Chicago for a base price of $21,055, you would reduce your taxable income by $1,948 (based on a 9.25% sales tax).
First-time homebuyer credit. Since a credit is directly subtracted from the taxes you owe, the first-time homebuyer credit could put up to $8,000 back into your pocket if you bought a house this year. To qualify, you must not have owned a principal residence in the past three years.
Your modified AGI must be $75,000 or less if single, $150,000 or under if married. Plus, closing and title transfer must be completed by Nov. 30. (If you can’t make the deadline, you may have another shot; bills to extend the credit have been introduced into the Senate.)
Replace old appliances
Thinking about buying a more energy-efficient furnace this winter? Congress has earmarked nearly $300 million in rebates for new “green” appliances. The rebates will typically range from $50 to $250 and take effect as early as the end of this year (dates, amounts, and method of redemption will vary by state).
While there’s no deadline per se, the offer operates like this year’s “cash for clunkers” program. “When the money is gone, the program will be over,” says Meighan of TurboTax. To find out when rebates start and what they’ll cover, go to energystar.gov (click on Tax Credits for Energy Efficiency).
Reap your losses
Even with the market’s rally this year, the S&P 500 (.SPX
) is still down 32% from its 2007 peak. So you probably still have losses in your portfolio. Take advantage of them and the chance to get rid of deadbeats.
If you sell a stock, bond, or fund in a taxable account for less than you paid, you can use the losses to offset your gains. Have more losses than gains? The IRS lets you deduct up to $3,000 in remaining losses from ordinary income. The rest can be used on future returns.
You can’t buy the same investment or one that is “substantially identical” within 30 days before or after the sale. (Otherwise, it’s considered a “wash sale,” and the loss is disqualified.) So you can’t, for example, swap S&P 500-tracking funds. But you can switch to a fund following another index (even a total stock index), and trading one actively managed fund for another is okay. “Presumably, the managers don’t pick the same stocks,” says wealth manager Chuck Roberson of Old Tappan, N.J.
Prep for the AMT
For once Congress passed its alternative minimum tax (AMT) “patch” early in the year, raising the income exemption on this parallel tax structure to $46,700 for singles and $70,950 for marrieds. Generally, higher earners must compute their tax bill using both the traditional code and the AMT, which disallows certain deductions and credits — then pay the higher. The patch is necessary because the AMT, which was intended to keep the wealthy from abusing tax breaks, is not tied to inflation.
The new exemption levels are similar to those for 2008. So if you were stuck last year, you’ll probably be stuck this year, says New York City CPA and tax attorney Alan Straus. It’s not easy to get out of the AMT trap, but some strategic end-of-year moves may help.
Since big deductions can tip you into the AMT zone, limit what you plan to write off. For example, don’t prepay fourth-quarter estimated taxes to your state, which you can deduct on your federal returns, in December. Wait till January.
Also, try reducing your income in order to make the most of your exemption: Max out your 401(k)s. Ask your boss to put off any bonus (ha!) until early next year. And if you’re self-employed, hold off on sending invoices.
(And if what you do now fails to get you off the hook, there’s still some potential for relief: As part of the stimulus package, Congress is allowing AMT payers this year to take tax breaks normally disallowed, such as child- and dependent-care credits.)
As always, send in donations to charitable organizations by the end of December if you want to deduct the gifts on your 2009 tax return. Also, this is the last year you can do a direct rollover from an IRA to a tax-exempt organization.
The 2008 Emergency Economic Stabilization Act lets you give up to $100,000 if you’re 70½ or older. You won’t owe federal income tax on the money (though you can’t take a deduction).
Speaking of estate-minimizing strategies: Remember that you can give up to $13,000 per recipient tax-free this year (a couple can give $26,000). That should make somebody’s holidays especially happy.