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Investing - Smart Year-End Tax Moves

Smart Year-End Tax Moves
Andrew Leckey

It's your move: Year-end tax moves can improve your position for the coming tax season and upcoming year. They're especially important because some steps must be taken before the year runs out.

Keeping the potential for tax hikes in 2010 and 2011 in the back of your mind, tend to your tax business in the here and now.

"Start getting tax materials together now because waiting until tax filing season is not being proactive," said Barbara Steinmetz, certified financial planner with Steinmetz Financial Planning in San Mateo, Calif. "We know what's happening for 2009, even though 2010 and 2011 are uncertain."

To maximize company 401(k) plan contributions, you must contribute by year-end. People 50 and older can contribute up to $22,000 in 2009, up $1,500 from 2008. People under 50 can contribute $16,500, or $1,000 more than in 2008.

Donations to charitable organizations must also be made by the end of December to deduct them on your 2009 tax return. If you charge your donation on a credit card, it is a valid 2009 deduction so long as it is made by Dec. 31 -- even if you don't pay the bill until 2010. Obtain a bank record or written communication from a charity that indicates name, date and amount of contribution.

Contributions to individual retirement accounts must be made by April 15, 2010. Maximum IRA contribution for those 50 and older is $6,000, while for those under 50 it is $5,000.

"There's a new federal tax deduction in 2009 for the state tax you pay when you buy a new car," said Steinmetz, noting you must take delivery of the car rather than simply sign a contract. "The deduction comes on the first $49,500 of the vehicle purchase price, and the purchase must take place between Feb. 17 and Dec. 31 of this year."

The new-car deduction is available to itemizers, non-itemizers and those subject to Alternative Minimum Tax (AMT), but it phases out as income rises. It pertains to purchases, not leases.

Have a viable investment tax strategy. You can use capital losses from investment sales to offset capital gains and up to $3,000 in ordinary income each year. The additional losses can be carried into later years until the losses are used up. That doesn't apply to tax-deferred retirement accounts.

"If you own taxable mutual funds in which you have a loss -- meaning you personally paid more than what the fund is now worth -- it is worth your while to sell that fund and lock in the tax loss," said Adam Bold, CEO of The Mutual Fund Store, an investment management firm specializing in mutual funds, in Overland Park, Kan. "Then immediately reinvest in a fund with a similar objective."

Under "wash sale" rules, if you take a capital loss you invalidate that loss if you replace your holdings within 30 days of their sale with the same investment. You can, however, invest in a different investment at any time or buy back the original investment after 31 days.

Investors hang onto weak mutual funds because they've owned them a long time and don't want to sell and pay taxes, said Bold. Taxes are never a good reason not to sell something that should be sold, especially when there's still a maximum capital gains rate of 15 percent for 2009, he said.

"Looking at the 2009 tax year, one thing different is that folks 70 1/2 and older did not have to take a required minimum distribution out of their IRAs," noted Joe Votava, CPA and CFP with the Nixon Peabody LLP law firm, Rochester, N.Y. "For 2010 they will have to go back to taking the regular minimum distributions."

The government has extended the first-time homebuyer tax credit deadline to April 30, 2010. It is a dollar-for-dollar tax credit of up to $8,000 for 10 percent of the cost of a home with more generous phase-outs than before. It also allows people who have lived in a home for at least five years to receive $6,500 if they purchase a new home. Taxpayers have the option of claiming the tax credit on 2009 or 2010 returns.

As always, taxpayers who are itemizing can potentially save by accelerating deductions into 2009. This could include prepaying 2010 deductible state or local property taxes, professional dues or January mortgage payment. You can try to prepay for medical services not covered by insurance, which are deductible to the extent they exceed 7.5 percent of adjusted gross income.

If you're subject to the AMT, that separate tax system that disallows a number of itemized deductions, you might push deductions into next year to avoid triggering the AMT this year.

"The so-called Bush tax cuts are going to expire at the end of 2010, and with a Democratic Congress and White House, there is significant effort afoot to raise tax rates," said Bold, acknowledging that midterm elections, health care reform and other considerations next year might postpone that.

While you shouldn't make investment tax plans based on dramatically higher future tax rates, assume slightly higher tax rates, Bold said. Examine your portfolio now to see what moves you should make sooner than later -- before capital gains and your tax bracket become less advantageous.