Year End Tax Planning - Individuals: Mix Old Strategies With New

Tax planning can be critical at the end of the year. Here are some new ideas to contemplate, along with tried-and-true year-end tax techniques.

 

Get a new set of wheels. Under this year's economic stimulus law (the American Recovery and Reinvestment Act of 2009), you can deduct the sales and excise taxes attributable to the first $49,500 of the price of a new vehicle purchased before 2010. However, this deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $125,000 for single filers and $250,000 for joint filers.

 

Give to charity. If you donate to a qualified charitable organization, you can generally deduct the full contribution amount on your 2009 tax return. Note that donations made by credit card are deductible for this year even if you don't pay the bill until next year. Be aware you must observe strict recordkeeping requirements for all donations.

 

Reverse your AMT thinking. The alternative minimum tax (AMT) continues to hit more middle- and upper-income taxpayers. Consult with your tax adviser concerning the complex AMT calculation. If you can't avoid the AMT, you might go against conventional wisdom and accelerate income into 2009. Reason: The AMT rate on the income can't exceed 28 percent -- which could be lower than your regular tax rate for 2010.

 

Lock in a homebuyer credit. New legislation signed in November extended and enhanced the homebuyer credit. For purchases after November 6, 2009 and before May 1, 2010, a long-time homeowner may qualify for a $6,500 credit on a new purchase. (The maximum credit remains $8,000 for first-time homebuyers). Also, the threshold for phasing out the credit is increased to $125,000 of MAGI for single filers ($225,000 for joint filers).

 

Arrange tax-wise securities sales. Taxes obviously aren't the only factor to consider when selling securities. But remember you can use capital gains from sales to offset prior losses for the year and vice versa. Any excess loss may offset up to $3,000 of highly-taxed ordinary income. Icing on the cake: The maximum tax rate on long-term capital gains this year is 15 percent. For someone in the regular 10 or 15 percent tax brackets, the usual 5 percent rate is reduced to zero.

 

Pay next semester's tuition. 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.

 

Watch out for dividend declarations. For tax purposes, it makes sense to sell mutual fund shares before the fund declares dividends at year-end and to buy shares after that date. This can lower the tax due on dividends you don't actually receive because of automatic reinvestments. Note: The maximum tax rate on most dividends from domestic companies remains 15 percent in 2010.

 

Coordinate family matters. Under the "Kiddie Tax," investment income above $1,900 received by your child may be taxed at your top marginal tax rate. This tax provision generally applies to children under age 19 or age 24 for full-time students. Keep your eye on the $1,900 threshold as year end approaches. It may be possible to reduce your family's tax liability by shifting funds into tax-deferred or tax-free investment vehicles.

 

Install energy-saving improvements. The economic stimulus law also enhances the tax benefits for saving energy at home. If you qualify, you can claim a residential energy credit equal to 30 percent of your expenses (up from 10 percent). The previous lifetime $500 dollar cap has been replaced by a $1,500 limit over 2009 and 2010.

 

Contact us to help determine if one or more of these year-end techniques is appropriate for you.