As 2008 winds down, now is the time for taxpayers to finalize their tax planning strategies for the year. The problem is that many taxpayers are finding year-end planning for 2008 to be more challenging than ever before. Remember, the higher the level of uncertainty, the more difficult planning becomes.
"With Obama taking office in January and the Democrats taking control of both Houses of Congress, no one knows what will happen with the tax rates in 2009. For that reason, we split our annual year-end tax planning advice into two groups - Definite & Maybe," explains Andrew Schwartz CPA, founder of FindAGoodCPA.com (www.FindAGoodCPA.com), a site where taxpayers can locate a tax professional in their metropolitan area based on the professional's specialty.
Definite
Let's start with those strategies that make sense no matter what happens with the Tax Code next year:
Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year. This year you can put up to $15,500 into your 401(k) or 403(b) plan. Anyone 50 or older by December 31st can put away an additional $5,000. If you’re self-employed, consider setting up a Solo 401(k) by 12/31. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.
Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income this year, most likely won't exceed that threshold next year, and you itemize.
Fully fund your child's or grandchild's 529 account up to the annual gift limit of $12,000 per year per donee, or $60k over a five year period.
Maybe
Now let's review some year end strategies that may not make sense if you feel that your income tax rates will increase in 2009. However, if you think your income will take a big hit next year due to the current economic mess, then these strategies probably still make a lot of sense to you. That's why they are in the Maybe bucket.
Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income, with any remaining losses carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules. Keep in mind that Obama has discussed increasing the maximum Capital Gains rate from 15% to 20%.
Send in your January, 2009 mortgage payment early enough so it will be processed prior to 12/31/08. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier. If tax rates increase, however, you might be better off delaying this mortgage payment until January.
Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, since only donations of clothing and household items in "good condition or better" qualify for a deduction. (Please download our Non-Cash Contribution Worksheet to help you determine the value of your donated items.) Higher tax rates in 2009 might mean a larger tax break if you hold off making this donation until January.
For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2009. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation. The higher the anticipated tax rates in 2009, the more taxes you might save by delaying your contributions to January.
Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax. Or, hold off making these types of payments until after December 31st if that will give you a bigger bang for the buck.
"For your final step, evaluate whether you'll save any taxes by postponing 2008 income or deductions into 2009 or by accelerating 2009 income or deductions into 2008," says Schwartz. "And now is the time to contact your tax preparer or one of the CPAs or EAs listed at www.FindAGoodCPA.com with any questions you have about year-end tax planning strategies."
About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of www.FindAGoodCPA.com, a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare, real estate professionals, and lawyers. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.
