It’s that time of year when all of us need to think about tax planning strategies to minimize our 2009 federal income tax obligations. That includes this baby boomer. Here are some year-end moves to consider:
2. Time Stack Your Deductions. If your itemized deductions are typically close to the standard deduction amount, consider accelerating and bunching itemized deduction expenditures every other year. Using this strategy, you itemize in some years to deduct more than the standard deduction, and in alternate years you claim the standard deduction. This can save you a bunch in taxes over time, depending on how variable your tax rate is. Deductions that you can bunch or accelerate can include mortgage interest, property taxes, work-related expenses and even some medical expenses.
3. Prepay College Tuition. If you still have kids in college and you qualify for American Opportunity or Lifetime Learning higher education tax credits, consider this: Prepay tuition that is not due until 2010 if that would result in a bigger credit on this year’s tax return.
4. Plan Major Purchases for Sales Tax Deductions. If you live in a state with no personal income taxes and you itemize, you have the option of deducting either state and local sales taxes or state and local income taxes on your 2009 return. So if a new car or boat is on your list, it may pay off tax-wise to buy it this year. Also, the federal stimulus plan created a temporary deduction for state and local sales and excise taxes paid on new vehicles purchased between Feb. 17 and Dec. 31, 2009. The deduction is limited to the actual taxes paid on the first $49,500 of the vehicle purchase price. You can claim this deduction whether or not you itemize.
5. Earn Tax Credits from Home Improvements. If you have been thinking about some energy-saving home upgrades, now may be the time to pull the trigger. A variety of improvements qualify, such as replacement windows and doors or a new HVAC system can earn you up to $1,500 in tax credits. To learn more about what qualifies for energy tax credits, visit the government’s Energy Star site.
6. Adjust Last Paycheck Withholdings. Now would be an excellent time to estimate your 2009 tax obligation and compare it to your actual year-to-date withholdings. Adjust up or down as needed to minimize your refund (free loan to the government) or to avoid an underwitholding penalty.
7. Maximize Your Retirement Plan Contributions. To lower your taxable income, contribute up to $5,000 per year to your deductible IRA ($6,000 if you are over 50). The contribution limit for 401(k) or 403(b) plans is $16,500 or $22,000 if you are age 50 and older. Try to bump up your contribution rate as needed at year end to hit your yearly limit. You can then lower it after Jan. 1.
I hope some of these year-end tax planning ideas are applicable to you. Do you have any strategies to suggest to me?