Attention campers! Your 2008 federal income tax return is due April 15, 2009. Start making your last minute preparations now!!!
Think I’m a bit premature in this warning? I think not. Although your return may not be due for another five months, your window for making last minute moves to manage your tax burden for the year is coming to a close on December 31, just a few short weeks away. For the most part, once we are in 2009 there is little you can do to reduce the taxes due on your 2008 return.
So what can you do to reduce the taxes due on your return? Here’s a short list.
1. Be aware of the tax law changes for this year. This will require a little bit of research, but I will share a few items that are of interest to me, many of which were cramped into the massive bailout bill approved a little more than a month ago.
- The sales tax deduction is back! You can choose to deduct either your state and local income taxes or your sales taxes on your return, but not both. The sales tax deduction was brought back a few years ago but had expired at the end of 2007 before it was included in the bailout bill. For those of us in states that don’t have an income tax, this is a huge break. For my family here in Texas, the deduction is about $1,700 for 2008 since our combined state and local sales tax is 8.25% (if we were itemizing).
- For the first time I can remember, there are extra deductions available for people who do not itemize. The one that will apply to the most people is that a married couple filing jointly can now deduct up to $1,000 for property taxes paid ($500 for single filers) and add that amount to the standard deduction. I’m not sure how many people will benefit from it since those who would pay property tax usually also have a mortgage and thus a mortgage interest deduction, but for those with small or paid-off mortgages this could be quite beneficial. Thankfully we fall into this category since our mortgage interest only amounts to about $7,000 a year.
- There were also changes to rules for claiming casualty losses in federally declared disaster areas. If you had a casualty loss due to a federally declared disaster in 2008, you only have to reduce the amount of your deduction by $100 (normal casualty loss rules require a reduction of both $100 and 10% of your Adjusted Gross Income). Additionally, this deduction can also be taken if you don’t itemize by simply adding the amount of the casualty loss deduction to your standard deduction amount. We had a few thousand dollars worth of damage from Hurricane Ike that our insurance doesn’t cover (stupid windstorm deductible), so again this is a benefit to us since the deduction would normally be wiped out by the 10% AGI reduction.
2. Max out those 401(k) plans! Yes, it probably stings just a little to do so after the massive losses most of us have seen, but consider that if you believe it will eventually go back up you are buying in when prices are at their lowest. Also remember that the more you contribute to your 401(k) the more money you are shielding from the blood-sucking IRS.
3. Consider selling off some losers in your stock portfolio before year-end. Almost all of us have stock that has lost us money this year. If you sell before the end of the year, you can use up to $3000 of the loss to offset other income lessening your tax burden. I’ll discuss it in more detail later this week, but if you have large losses in your 529 plans or Roth IRAs, you may be able to sell and claim those losses (net of a 2% of AGI reduction) as itemized deductions (note: if you plan to take the standard deduction, this doesn’t help you).
4. Either speed up or delay your other deductible expenses. This one requires a little more planning. I’ve discussed before about my tactic of bunching deductions, whereby you try to lump your deductible expenses in alternating years. For instance, last year I made all the charitable contributions I anticipated making in 2008 in the month of December 2007 (I believe in tithing my income to my church, so I have a pretty good idea that I will be donating and how much the donation will be) and also paid my property tax for 2008 before the end of 2007. This year (2008) I have not made any property tax payments (although I will make a $1,000 payment before the end of the year since I can increase my standard deduction) and I have not made any charitable contributions (remember, I made my anticipated contributions for this year in 2007). I have minimized my deductible expenses in this year so I can pay them out and claim them on next year’s return, maximizing the benefit of the standard deduction this year and maximizing the sum of my itemized deductions next year. Come January 2009, I will be paying the remainder of my property tax due and sending all of the household items I no longer want off to Goodwill and will happily claim the deductions on my 2009 return.
With the explanation of bunching deductions out of the way, let’s get back to the main topic at hand. If you are going to itemize for 2008, make sure you incur all the deductible expenses you can before year-end. That would include things like property tax payments, charitable contributions, and mortgage interest (you are typically allowed to pay one month in advance to claim the interest on your taxes, so go ahead and send in that January payment before year-end). If you are in a position where you can deduct your medical expenses (this is typically subject to a reduction of 7.5%), go ahead and incur as many of those expenses as you can as well. If you are planning a major purchase like a car, consider making the purchase before year-end since the sales tax on some big ticket items can be added to the sales tax deduction amount in the estimation tables (of course, you can always use your actual sales tax paid if you feel like going to the trouble of adding it up).
These are just a few things to think about with regards to your taxes. Of course, you should consult your own financial advisor or accountant before making any moves for tax purposes. Although I am an accountant, I am not a tax expert, and even if I were everyone’s situation if different. In any case, good luck in achieving the most patriotic of goals an American can have: legally avoiding taxes!