Tue, October 06, 2009
Nine Strategies for Minimizing Your Taxes in 2009 (and 2010)
At this time of year it’s a good idea to look for last-minute opportunities to minimize your taxes. Most opportunities require some action before the end of the calendar year; here are several ideas to consider.
•If you’ll be in a higher tax bracket this year, consider prepaying deductible 2010 expenses in 2009. Qualified purchases made this year using a credit card are deductible even if you don’t pay your bill until 2010.
•If you become eligible to make tax-deductible health savings account (HSA) contributions as late as December 2009, you’ll be entitled to make a full year’s worth of contributions for 2009 even though the year is almost over.
•Have you spent all the money in your health flexible spending account (FSA) already? Unless your spending was unusual this year, you should probably remember to increase the amount that you set aside for 2010. On the other hand, if you have money left in your FSA, remember that the cost of many over-the-counter drugs, including antacids, allergy medicines, pain relievers and cold medicines may be reimbursable.
•If you know you’re going to owe state or local income taxes when you file your 2009 return, consider asking your payroll department to increase your state/local tax withholding before year-end. However, make sure that this strategy doesn’t cause you to owe more Alternative Minimum Tax (AMT). These tax deductions are disallowed under AMT; if you end up owing AMT the approach could backfire.
•Along the same lines, if you’ve owed AMT in the past or are near the AMT threshold, you may not want to “load up” on deductions that are disqualified under AMT. Among these are deductions for state property taxes, state income taxes (or sales tax if you elect that option), miscellaneous itemized deductions, and personal exemption deductions. Because of the quirks of the AMT, it may actually be to your advantage to defer such deductions (especially if you won’t owe AMT next year) rather than accelerating them.
•If you know that you’ve under-withheld this year and are facing a federal tax penalty, you might be able to reduce or eliminate it by increasing your withholding for the rest of 2009.
•Assuming you’re not in the AMT regime, you might be able to reduce your overall tax liability by “bunching.” This involves pulling enough miscellaneous itemized deductions, medical expenses or other itemized deductions into one year so that you meet the deduction thresholds. Depending on your situation, it may make more sense to pull these expenses into 2009 or push them into 2010; you’ll have to run the numbers or have your tax preparer do so.
•There are a variety of miscellaneous expenses that can only be deducted to they extent that they exceed 2% of your adjusted gross income. You should consider “bunching” these into a single year if that would make some of them deductible; this would include subscriptions to professional journals, paying union or professional dues, job-related courses, or other work-related non-reimbursed expenses.
•Under the gift tax exclusion, you can give $13,000 each to an unlimited number of people every year without owing Federal gift tax. This exclusion is lost after the year ends, so you should consider using it soon if (for example) you want to stuff lots of money into a child’s 529 plan. You can save gift and estate taxes by making gifts sheltered by the exclusion.
One last thought: Congress might decide to extend the first-time homebuyer’s credit, currently set to expire at the end of November, but expect it to be done at the last minute.
Remember: The advice given here may or may not be appropriate for your individual situation. As always, tax strategies should be discussed with a qualified tax adviser before doing something that you can’t undo.