Don't Mess With Taxes

Tax moves you must make today

Are you ready to party!? I don't want to get in the way of your New Year's Eve preparations, but I do want to mention a few literally last-minute tax moves that could be a real cause for celebration.

Since time is fast running out, I'll be quick.

Charitable giving
You've got to make charitable gifts today if you want to claim them on your 2008 return. This means getting any clothing or household appliances to your favorite charity's drop-off location before it closes this afternoon. 

You have a bit more leeway with monetary contributions. Most nonprofits take credit cards, so call this morning and charge your 2008 donation. As for gifts by check, Joe Kristan, who writes Tax Update items for Roth & Company, PC, has the scoop on getting your contribution in the mail.

Investment moves
Did your portfolio suffer some losses? Whose didn't? If you haven't already sold those stinky stocks, call your broker now! If you do have any gains, you can use those losses to offset them. If everything is on the loss side of the ledger, you still can use up to $3,000 in losses to help reduce your ordinary income.

Home tax breaks
Don't forget the tax breaks offered by your home. Make your Jan. 1 mortgage payment today so that the interest amount can be deducted on your 2008 Schedule A. The same early-payment strategy applies to deductible real estate taxes.

State and local sales taxes
Congress finally got around in late October to renewing the sales tax deduction. Most folks will use the tables provided by the IRS instead of tallying the state and local levies on hundreds of register receipts. But one large sales tax amount is worth noting: the amount charged on an auto purchase. You can add that sales tax amount to the table's number. I'm not saying you need to rush out and buy a vehicle today, but I am just saying if you're close to making such a purchase, it might be worth it to close the deal today.

Automotive tax benefits
And if that new auto is a hybrid, you could get a tax twofer. The tax credit for hybrids is still in effect. The only problem is that the amounts for the most popular hybrids are long gone or fading fast. Toyota's hybrids no longer carry any added tax benefits. Tax credits for Honda hybrids disappear on Jan. 1, 2009. So if you want a hybrid Accord or Civic, get to your Honda dealer today.

Higher education
Going to college or got kids in school? Then William Perez, who pens About: Tax Planning: U.S., says you should consider paying some of those upcoming higher education costs today. Check out his advice on prepaying college costs.

OK, enough tax talk. I'll let you get to these final tax tasks so you'll still have plenty of time to get ready for your New Year's Eve festivities.

Have a fantastic time tonight and be sure to raise a glass of bubbly to salute not only the arrival of 2009, but also all the tax-smart year-end moves you've made.

2008 Year-end Money Moves: Details

2008 is almost over, but there's still time to take care some financial housekeeping.

Today, Part 5 of our Year-end Money Moves looks at ways to deal with these necessary fiscal tasks.

Completing these tasks now and updating them at least annually, will help you stay on top of your money. And knowing what you have will help you maximize it.

Get organized
I admit it. I've neglected this for the last 11¾ months. I have all my monthly bank, bill and investment statements, but they are just stacked up in my office. Separate stacks, at least, but not properly filed in their respective folders in our personal accounts filing cabinet.

A couple of times I've have to rifle through the stacks to find a document I needed. It was not fun, because I was looking for something to clear up a problem. I knew I had it, but it took me a few extra minutes to get my hands on it. Since I was already irritated, not being able to immediately pull it out to make my point was an added frustration I could have avoided if the documents had been filed properly as soon as they arrived.

When you do file your account statements, make sure your organization system includes a category for taxes. You'll want to put, for example, all your receipts for deductions, such as business expenses and charitable gifts, and income statements (salary and investments) in a place where you can easily get to all of them when it's time to fill out your 2008 return next year. 

I'm a big fan of accordion folders. They're expandable and easily portable, allowing you to grab the folder and take all your necessary documentation to your tax prep material to your workspace or accountant if you hire out the job.

Put estate documents in place
Most of us tend to put this off. Mortality is not a comfortable consideration, but not properly preparing for the inevitable is not going to stop it. And delaying these financial tasks will only make things more difficult for your family. So do everyone a favor and at least think about these issues before the end of the year.

Make sure your beneficiary designations are up to date, on insurance policies as well as financial (especially retirement) accounts.

You can always change these documents later as needed, but it's critical to get something in place as a start. 

Tell your spouse or partner
The hubby and I are equal partners. But when it comes to the actual, day-to-day administration of financial duties, we split the responsibilities. I suspect most couples do the same. 

And I suspect these couples also are like the hubby and me in that while they know the other's responsibilities are crucial, we don't know exactly how they accomplish the tasks that we all too often take for granted.

So take a few minutes each year to discuss the mechanics. And be sure to thank your better half for all he or she is doing! 

Write it down
In addition to talking about your respective household financial duties, put all the details on paper. Make backup copies, both in paper form as well as electronically, e.g., on a flash drive you can put in a safe place.

Create an emergency letter for each other, listing the details you probably do know about each other -- birth date, Social Security number, extended family contact info, employment data -- as well as stuff that just doesn't tend to come up in daily conversation, such as drivers license numbers, credit card account numbers (some creditors issue each account holder a slightly different set of digits), etc.

You'll also want to include in this comprehensive list:

• Location of wills, trusts, dates completed, attorney, executors, birth certificate information and location.

• All bank accounts, savings, money market accounts, etc.   

• Safety deposit box information     

• Annuities, dividends, interest earned, part time jobs, business, etc.     

• Brokerage accounts, 401(k), SEP/Keogh, stocks, IRAs, bonds, etc.      

• Registration data for autos and other vehicles    

• Deeds to your residence and other real property; note balances owed, loan company information and account numbers   

• Insurance policies on your residence, vacation property; include account numbers, addresses, amount of coverage, agent's name and address, etc.    

• Other insurance, e.g., life, health, auto, long-term care, umbrella policies; include account numbers, addresses, amount of coverage, agent's name and address, etc.     

• Creditor data, e.g., personal loans, credit card accounts, etc; note balances owed, loan company information and account numbers 

If you've organized your documents, gathering the information and compiling it an easy to access format will be a snap.

Your financial adviser probably has a document you can use to accomplish this. Many financial planning software programs do the same.

You also can check out  Mrs. Micah's Financial Life Worksheet, which she has made downloadable (in zipped form) at her Finance for a Freelance Life blog.

Don't forget financial passwords
Sharing this crucial computer access information is especially important if one or both of you handles accounts electronically. If something happens and your partner isn't able to take care of this or provide the details, you'll need to assume his or her duties in this area until he or she can resume them. So be sure to include your passwords, as well as your security Q&As, on your financial document list.

Take care of Mom and Dad
It's also a good time to check up on your parents, especially if they're older and you don't see them regularly. You might have done this when you, your folks and your siblings got together over the holidays. If so, great! If you didn't want to bog down the festivities with real-life concerns then, take some time -- and do it soon -- to have this difficult but necessary discussion with your family.

Hopefully, you'll confirm that Mom and Dad are doing OK. But if they do need some help, discuss ways y'all can help them handle routine tasks or their finances.

You can find signs your folks might need help in this story. And this article has some tips on conducting a fruitful adult child-to-parent money conversation. 

Whew! Yes, it's a lot of stuff to do in very little time. But even if you can't take care of it all by Dec. 31, at least get started. Once you get the framework in place, the annual maintenance will be easier at the end of next year.

If you missed any of our previous four parts of this year-end 2008 money moves series, just click the following links to catch up: Taxes, Investments, Retirement and Giving.

Here's to a Happy and Prosperous 2009!

Keep the giving going

Another Christmas has come and gone and, as always, it was a fine one. Every year the hubby comes through on special (and other) occasions.

As for me, sure, there were a few things I wanted to get but didn't get around to picking up. No problem. My unpurchased gifts can wait until January. That's the month the hubby and I were married, so I can always call them anniversary presents and still get "good wife" credit! That's our secret, OK?

After the holiday hubbub dies down it's also a good time to think about giving to strangers, specifically folks who didn't enjoy much seasonal cheer.

We all know about the major philanthropic organizations that put on big end-of-year, reason-for-the-season giving pushes. If you've already given to Goodwill, Salvation Army, Toys for Tots or your more local charity of choice, that's fantastic.

If, however, the chaos of Christmas got in the way of donating to your favorite nonprofit, don't despair. They'll gladly take your gift whenever you can get around to it.

And if you contribute by Dec. 31, it also could help your personal tax bill bottom line.

Getting the tax most out of gifts: Taxpayers who itemize can include charitable gifts on their Schedule A. For most folks, that means that all our donations are deductible.

Big givers might face a limit, as will folks whose overall itemized expenses are reduced because they earn over a certain amount; $159,950 is the cutoff amount for 2008 returns.

So go ahead and give by the end of the year to do unto others and do yourself some tax good, too.

And even if you don't get a tax break or get a reduced one, you'll still get the full benefit of knowing you helped out someone else.

Interesting ways to give: Ideal Bite put together this list of intriguing ways to give that I didn't know about.

• CharityUSA -- Choose a specialized e-mail account from a variety of causes and your electronic messages will help support that group.
• Care2 -- Test your knowledge and, among other things, help conserve land, assist children and stop violence against women. 
  
• TheNonProfits -- Here you'll find links to more than 50 different click-to-donate sites.

Ways to help other than donating directly include:

• Care2 E-mail -- Help different social justice and eco-charities with your free, donation-linked email account.    
• Free Rice -- This online game help you brush up your vocabulary. For each answer you get right, you'll donate 20 grains of rice to the UN World Food Program.   
• GoodSearch -- This search engine powered by Yahoo donates 50  percent of revenues to charities that you choose.

More giving ideas and discussions can be found in my year-end moves post, as well as in this IRS Web page about year-end donations , Practically Speaking and Fun Times Guide to Money & Finances.

Salvation Army drummer photo
courtesy pheezy & Flickr/Creative Commons

Companies dropping 401(k) match

The conventional year-end wisdom is to max out your workplace defined contribution retirement plan.The argument made by many, including me in my recent year-end retirement moves post, is that you're leaving money on the 401(k) table if you're not putting in enough to at least get your employer's full matching contribution.

Well, the economy has once again turned conventional wisdom on its head.

The New York Times reports today that In Need of Cash, More Companies Cut 401(k) Match.

Thanks a lot.

Piling on: This latest assault on retirement savings comes on the heels of a stock market, in which many such retirement plans are invested, that has already eaten up a large chunk of account values.

Some folks who lost their jobs or are facing unexpected expenses have taken some or all of the money out of their tax-deferred accounts.

Now companies are pulling the plug on one of the most appealing enticements, added money that grows sans tax for years, so we're losing the value of those extra compounded earnings.

Even worse, there's nowhere to turn. With the continuing interest rate drops, "safe" alternatives such as CDs are about as appealing as a mattress. With financial institutions still shaky, the bedroom stash even edges ahead a bit.

And none of us is getting any younger. Retirement will be here in many cases long before we can comfortably afford it.

Are you affected … yet? The Times article focuses on big companies -- Federal Express, Motorola, Eastman Kodak, Ford; see a complete list of 401(k) cutting companies in this table -- but the trend is likely to spread throughout the workforce.

Did you contribute as much as you could to your 401(k) this year? Did you get a company match?

Has your employer indicated that it will be reducing or eliminating its contribution to your retirement account? If it does, will you also cut the amount you put in your 401(k)?

Time running out to tap FSA accounts

Few things are worse than being sick over the holidays. With Austin's literally hot and cold weather, a lot of my friends have the sniffles. I'm sure thing are much worse for folks dealing with really bad winter conditions.

That means in addition to tending to last-minute gifts, all these under-the-weather shoppers also are popping into the local drug store to pick up some cold, allergy and/or sinus medications.

The good news for my ailing friends, readers, and the family and friends they'll be visiting, is that most of the over-the-counter treatments do a decent job of relieving symptoms. The better news is that folks with medical flexible spending accounts is that they can use that account cash to pay for their Sudafed, Nyquil and similar products.

Tax and treatment savings: The beauty of an FSA is that it helps reduce both your tax bill and your out-of-pocket medical expenses.

Your contributions go into the FSA before your withholding taxes are computed. That gives you a lower wage base upon which you owe Uncle Sam. Then when you have to fork over medical co-pays, deductibles or treatment costs, you're reimbursed the money you would have spent anyway from your tax-saving FSA funds.

The one major downside of an FSA, however, is its use it or lose it feature. Any cash left in the account at the end of the benefit year goes to your employer.

Companies do have the option to give workers 2½ months, or until March 15 for calendar year benefit plans, to spend the money, but that's optional. Check with your company and if it doesn't give you the extra time, you have just a few days left to make FSA eligible purchases.

The obvious purchases are the medications we've already talked about. But you can get a bit creative. Consider a first-aid kit, which could come in handy if you run into trouble putting together one of the kid's toys, or a blood pressure cuff to help you document just how stressful your holidays might be!

FSA lost money misconceptions: Some folks think that giving back their FSA money will cost them extra at tax time. Not true.

You won't owe tax on the relinquished money. You never got it, so it's just gone, of no use to you or the tax collector.

In that same vein, neither can you claim it as a loss as one creative taxpayer suggested in an exchange with my tax-blogging colleague Robert D Flach, The Wandering Tax Pro.

"You cannot claim a 'loss' or miscellaneous itemized deduction for unused, or forfeited, FSA monies," says Flach. "If you contributed $5,000 of your wages to the FSA then your 'take home pay' and your federal taxable wages (and possibly state taxable wages) are reduced by $5,000. If your gross wages are $100,000 the W-2 will show $95,000. If you only submitted $4,000 in expenses then you have indeed suffered an economic loss of $1,000 – but it is income that was not taxed."

FSA spending suggestions: So that you don't have to worry about forfeited FSA funds, spend down your account by Dec. 31.

FSA plans generally allow you to be reimbursed for medical expenses that the IRS says are deductible. A list of such items and procedures starts on page 5 of IRS Publication 502.

However, that list is a starting point. FSAs typically offer more spending leeway. For example, the aforementioned over-the-counter medications cannot be claimed as a medical expense deduction on your Schedule A, but you can use FSA money to pay for those items. Check your benefits plan documents for specifics, since the company, or more often, the firm it hires to administer it, has final authority regarding eligible expenses.

For an idea of the variety of medical expenditures allowed by some plans check out these Web pages:

• SHPS  
  
• Wage Works 
  
• ASIflex 
  
• HealthZone
  

Pharmacies, both brick-and-mortar chain stores such as Walgreens and CVS, as well as online sites such as DrugStore.com, have special online sites that highlight products usually covered by FSAs.

If you go into the actual store, don't forget to check your receipt. My local Walgreens' register tape notes that my sinus medication is FSA eligible.

2008 Year-end Money Moves: Giving

The Year-end Money Moves series is back, this time with tips on giving by by Dec. 31.

Apologies for the fits-and-starts appearances this year of the five-part presentation. It's been a crazy winding down of 2008 and we've still got a couple of weeks to go!

Part 1 of our Dec. 31 deadline series took a look at tax moves to make and debuted Dec. 2. Part 2, investment moves to make now, showed up on eight days later. And year-end retirement steps, Part 3 of the series, appeared on the ol' blog on Dec. 11.

Today's installment, Part 4: Giving, examines how helping out others can also be a perfect financial and tax gift to yourself. There are lots of opportunities here, so let's get started!

Know the ground rules
Uncle Sam encourages a charitable spirit, as long as you follow the tax agency's guidelines. First, you must itemize to deduct any donations. If you claim the standard deduction, which most taxpayers do, your generosity will help out your charity of choice, won't help reduce your tax liability.

Itemizing taxpayers also must be sure to give to an organization that has been vetted by the tax agency. Check Publication 78 to ensure the nonprofit meets IRS standards.

You also need to make sure you document your gifts. The IRS now demands that you have a canceled check, bank record or an official receipt from the charity to verify your gift, regardless of how large or small it is. You don't have to send this info to the IRS with your return, but if the IRS asks and you can't produce the document, your gift could be disallowed.

And, in keeping with this post's theme, remember that timing is everything. To take advantage of a donation on your coming tax return, you need to make the gift by Dec. 31.

Household goods can be good tax breaks
Donating household goods and clothing that you no longer need also can help out your bottom tax line and others.

Unfortunately, some folks were giving away crap under the guise of helping out others. Yes, I said it: Crap. And the only ones they were helping were themselves, by making inflated tax deduction claims regarding the worth of the items.

So lawmakers decided to make it a requirement that any donated clothing or household goods be in good or better shape. If they're not, then the IRS can automatically disallow your deduction.

The key here is to use the true fair market value of your gift. There are several software programs that can help you figure this out, as well as IRS Publication 561, Determining the Value of Donated Property. You also might check out eBay to see what the going price is for an item you're giving to your local Goodwill or Salvation Army branch.

So be an ethical giver. Don't try to pawn off your crap on groups trying to help out others. No one wants your raggedly socks or slacks that are so worn you can literally see through the seat. If your goods are that awful, be honest and drop them in your trash can. Then send a check to the charity instead.

The payoff of appreciated property
If in rebalancing your portfolio after this difficult stock market year, you find an asset no longer fits your investment strategy, it could be a perfect charitable gift.

As long as the asset has increased in value (admittedly a challenge in 2008, but possible if you've had the asset for a while) and you've owned it for more than a year, you can give it to a nonprofit and deduct its full fair market value. The charity then can use it and you avoid any capital gains tax on the asset's appreciation.

To get the maximum tax benefit here, make sure you've held the asset for the full 12 months plus one day; if you give away property held one year or less, you only are allowed to claim a deduction on the price you paid for it.

The value of vehicular donations
Ready to dump that jalopy you've been puttering around in? Think about giving it to a charity instead. The donation could be more valuable to you as a tax write-off than what you'd get for it or its parts.

But in giving your vehicle away, you must make sure you follow the tougher rules that the IRS put in place several years ago. Unfortunately, some folks overvalued their auto donations (just like those ratty clothes they also gave away), so now the IRS has more complicated guidelines to assess the proper donation claim in these cases.

Your actual automotive gift tax break depends not only on the actual, fair market value of your vehicular donation, but also upon how the charity uses the car (or van or truck or motorcycle or even boat).

You can find details on the rules in IRS Publication 4303, A Donor's Guide to Vehicle Donations, as well as in this story.

A special opportunity for older donors
If you are 70½ or older, you can have money from your IRA sent directly to your favorite charity. The option is applies to both traditional IRA and Roth accounts, but it's probably more beneficial to traditional IRA account holders, since much of the money in these accounts is eventually taxable.

When it goes straight to a charity, usually in the form or the account holder's required minimum distribution, the contributed cash is not counted as taxable income to the IRA owner.

The big drawback here is that these direct gifts from an IRA are not deductible. That, however, might not be that much of a disincentive, since many older taxpayers (like most taxpayers of all ages) do not itemize.

So far, this direct from IRA to charity strategy is still effective for 2008. However,  a new law  (as soon as Dubya signs the legislation) will waive the RMD rule in 2009 and that could cost charities some money next year.

As for 2008, there's still a possibility that the Treasury Department will make some changes before the year ends regarding 2008 RMDs.

Keeping it in the family
Some taxpayers also will want to look at giving financial gifts to family (and friends) this holiday season, or at other times of the year.

In 2008, you can give up to $12,000 (or $24,000 for married couples) to as many individuals as you like or can afford -- and if you've got a lot of $12K chunks to pass out, let's talk! These gifts have no tax ramifications for either the giver or the recipient.

And remember that this gift doesn't have to be cash. You can give up to $12,000 worth of appreciated securities to someone.

This might be something to think about if, for example, your retired parents' income is low enough to allow them to take advantage of the zero capital gains rate. Give them appreciated stock worth $12,000 by Dec. 31 and they can sell the asset any time before by Dec. 31, 2010, and not owe any capital gains taxes.

Required retirement withdrawals waived … in 2009

Remember in yesterday's post on year-end retirement moves, I mentioned (look for the "breaking news" icon) that Congress was looking to provide some relief with regard to required minimum distributions?

They did. Now the measure is awaiting Dubya's signature.

Here's the deal.

If you have a traditional IRA or 401(k), when you turn 70½ you usually have to start taking out some of that money. It's been growing tax-deferred for long enough, or so says the tax code, so you have to pull out some money and pay taxes, at regular rates, on the withdrawals.

These are known as required minimum distributions, or RMDs. Forget or ignore your RMD (the IRS has tables that help you figure out the precise amount), and you'll face a stiff penalty.

But with the stock market in chaos and retirement (and other) funds losing so much value, lawmakers thought that making people pull out RMDs wasn't quite fair. What they want to do is keep retirees from having to sell some investments at a loss just to meet the tax rules.

So as part of the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327), RMDs for 2009 are waived.

What about 2008? The temporary suspension of RMDs is great news for older account holders who would be facing this task in 2009. But the new soon-to-be law doesn't do a thing for folks who have a Dec. 31, 2008, RMD deadline to meet and are confronting the same lost value concerns.

There's still hope that Treasury will issue a ruling to help out those folks via a regulatory pronouncement. Several members of Congress have been urging Secretary Henry Paulson and crew to do just that.

I add my voice to that clamor. If federal officials can change the rules for banks, then they can do a little something for older taxpayers.

Clint Stretch, managing principal of tax policy for Deloitte Tax, told USA Today that one possibility is that the Treasury could allow retirees facing an RMD in a couple of weeks to calculate their withdrawals based on the value of their IRAs at the end of 2008, instead of the end of 2007. For most seniors, that would result in smaller withdrawals.

Treasury spokesman Andrew DeSouza said in an e-mail to the newspaper that the department is "studying its regulatory options."

Additional reading: You can read more about the RMD change and other parts of the new pension law by reading the bill's actual text, as well as the Joint Committee on Taxation's explanation and, for all you numbers geeks, the Committee's revenue analysis.

More readable news stories can be found at the aforementioned USA Today, as well as from the Associated Press, Bloomberg, the New York Times, Reuters, MarketWatch, the Wall Street Journal and the Washington Post.

2008 Year-end Money Moves: Retirement

Today, our Year-end Money Moves feature focuses on things you should do now to enhance your retirement earnings.

This is Part 3 of our series. Part 1 covered tax tasks; Part 2 looked at imminent actions in connection with your investments. As noted in those earlier posts, there is tax crossover in all these categories.

And now, since every passing moment moves us closer to our eventual retirements, let's look at some moves you can make by this Dec. 31st to help make your future retirement years truly golden.

Contribute to your company plan
The current economy has prompted many folks to stop contributing to their retirement accounts. Some have even felt compelled to raid their nest eggs to make ends meet today.

However, if you can, you should leave your retirement accounts along and, if possible, continue to contribute. This is especially true if you have a workplace retirement plan, usually a 401(k) or 403(b) if you're a public employee, and your company matches a portion of your contributions.

If you don't take advantage of the company match by contributing at least enough to get your employer's money, you are passing up free retirement money.

Contribute to your IRA
Similarly, some folks have neglected their IRAs during this downturn. I agree, it's hard to put money into an account that's gone down in value. But if you are convinced that the funds are the appropriate ones for your retirement savings, the lower share costs mean you're getting a value right now.

For the 2008 tax year, you can contribute up to $5,000 to an IRA, either traditional or Roth. If you're 50 or older, you can put an extra $1,000 into the account.

The advantages of a Roth are well known:

• Once you turn 59½ and have had the account for five years, you won't owe taxes on distributions.
  
• You can continue making contributions to a Roth for as long as you want, regardless of your age.
  
• As for spending the money, you decide, not Uncle Sam. Unlike a traditional IRA, you don't have to take required minimum distributions (RMDs) when you turn 70½. More on this in a minute.

Some people, though, still contribute to a traditional IRA, usually so they can claim a tax deduction or because they make too much money to contribute to a Roth. Review your personal situation and determine which IRA is best (or available) for you and contribute now.

Move your IRA money
If you think your IRS account is a real stinker, the good thing about an IRA is that you can move it -- by direct trustee to trustee transfer, of course -- and not worry about paying taxes on the money.

If you changed jobs or even were laid off in this downturn, you might want to take your retirement account out of your old employer's control. Again, the best tax move here is to directly transfer the money to another qualified retirement plan, either at you new workplace or an IRA.

This Phoenix Companies Web page has the scoop on rolling over retirement funds.

Take your required distributions
Remember those RMDs mentioned just a bit earlier? Here's the "more" that was promised.

If you have a traditional IRA or 401(k) and you turned 70½ in 2008, you're going to have to take some money out of your tax-deferred accounts … maybe.

Tax law usually requires older owners of certain retirement funds to take out a certain dollar amount so that Uncle Sam finally gets his cut of the earnings that have been growing tax-deferred over the years.

But with the stock market's recent quasi-crashes, there's concern that the account value that some taxpayers will be forced to use to figure RMDs will mean that they will have to take out more than they would have if the calculations were run on today's lower valued accounts. So there's a move afoot to waive the RMD and/or penalty for not taking it in 2008 and/or 2009. If and when this will happen is still up in the air.

During this lame duck session to consider a U.S. auto industry bailout, lawmakers decided to fiddle with a few other items. Last night, the House approved a pension bill that, in part, provides RMD relief for the 2009 tax year. It's now in the Senate's hands.

But what about 2008 RMDs? There's talk that Treasury might just issue a ruling that would take care of things for those folks. There's also pressure being applied to Treasury in this regard by members of Congress and advocacy groups.

So if you're facing a Dec. 31 deadline to take an RMD, my best advice right now is to hold off for a bit longer if you can. Maybe in a day or week or so this will be a bit clearer.

Consider converting to a Roth
If your adjusted gross income is less than $100,000 and you have a traditional IRA, look into converting it to a Roth IRA.

You don't have to switch over your whole account; you can move just a portion of the money. It might make sense if your income is lower this tax year so that the taxes you'll owe on the move won't be so much.

Even if you don't qualify for a Roth conversion now, make a note to do so in 2010. That year, thanks to the Tax Increase Prevention and Reconciliation Act of 2005, any traditional IRA owner will be able to convert the account regardless of income. So you can make nondeductible contributions now and in 2009, and then convert the funds in 2010 and beyond.

Once again, however, your IRA's value might have more bearing on this decision than your tax considerations. There are some interesting conversations and scenarios on converting a traditional IRA to a Roth account in a down market in this Morningstar forum.

Open a self-employment plan
If you work for yourself, either full-time or as a side job to supplement your working-for-the-man wages, you can contribute to a retirement savings plan covering these earnings.

While some options allow you to delay opening a self-employed retirement account until next year's filing deadline plus any extension, others (e.g., a solo 401(k) or Keogh) must be set up by Dec. 31. 

These self-employment retirement savings options that have the year-end deadline generally allow you to save much more, so don't miss out if this situation applies to you.

2008 Year-end Money Moves: Investments

Remember about a week ago when I promised you Don't Mess With Taxes' second annual Year-end Money Moves series and kicked it off with tax moves to make by Dec. 31? I haven't forgotten!

It's just that some other interesting timely blog items popped up. Then, just as I planned to start the series, I was in the Washington, D.C., area at the annual Taxpayer Advocacy Panel meeting and it pretty well sucked up all my time.

And once I got home, I was trying to catch up and get into the holiday swing of things on a personal level.

Yeah, I know, everyone has a sad story, and that was mine. But enough excuses! The Year-end Money Moves to Make series is back! And today we're looking at some investment actions you might want to consider by Dec. 31.

As mentioned when we started this series, you'll see that several of these investment moves also have tax considerations.

Rebalance and diversify
Any investor knows the importance of balance. Some folks obsess about their assets, checking values daily (or more) and are constantly trying to tweak their holdings. Others buy a stock or fund and don't pay any attention to it for years. Neither is wise.

And when an economy is bad, and the market even worse, things get more complicated.

It's a challenge to stick with the market when it's down, but if you've still got at least five years before you need to cash out your holdings, stick with it. Over the years equities have proved to be a good long-term investment. Diversifying your portfolio is a key way to handle market volatility, since different sectors perform well under different market conditions.

Sell losers to offset winners
For most folks, it's going to be much easier this year to find losers than winners. But if you were able to sell some stocks and make some money, now is a good time to make tax use of those holdings that didn't do so well. You can use the losses to offset the taxes on your investment gains.

Don't forget about any prior year losses that you carried forward. And keep in mind that you also can use these capital losses to offset up to $3,000 in ordinary income.

Factor in mutual fund distributions
When mutual fund year-end statements arrive in January, many fund owners are going to be in for a big, and bad, surprise. Although the value of the funds may have gone down in 2008, they might owe taxes on the holdings.

The reason? You're not in total control of your investments; your fund manager is. And with the market gyrations this year, fund managers have sold assets throughout the year, passing along a portion of any gain from those sales to you and your fellow shareholders as capital gains distributions.

There's not much you can do about those sales, but you can prepare for them. Give your broker or fund company a call and try to get an idea of what you might be facing. Then pay at least a portion of the expected tax bill by having your employer withhold a specific dollar amount from your last 2008 paycheck or two, or make up the difference with your final 2008 estimated tax payment in January.

You can read more about this investment tax predicament in this blog post from October, which also looks at one recommendation to ease this tax bite.

Pay attention to distributions
Speaking of mutual funds, if part of your portfolio rebalancing includes buying a fund or two, don't make the purchase until after the fund makes its year-end payout. If you buy just before the distribution date, as noted in this Kiplinger story, you'll end up with a tax bill on that new investment.

If, however, you want to sell a fund, experts suggest you do so before it makes its annual distribution. This date, known as the ex-dividend date, can be found on the fund's Web site.

Take advantage of zero capital gains rate
If you're in the 15 percent tax bracket, or can realistically get your taxable income level down to that point, you can save on any capital gains you might have. In 2008, and continuing through 2010, individuals at that earning level will enjoy a zero-percent rate on long-term capital gains instead of the current 5 percent rate.

The 15 percent bracket in 2008 tops out at $65,100 for joint filers, half that for single taxpayers. Remember, however, that all investment decisions should always be based on your overall financial situation and not just tax considerations. So if it's not a good time to sell an asset, don't do so just to save some tax dollars.

Keep an eye on the kiddie tax
Another issue that investors who are parents need to note is the "kiddie tax," which in 2008 applies to more young asset owners. This law was created to keep parents from shifting assets to their children in order to take advantage of the child's lower rates.

In 2008, the kiddie tax applies to children younger than 19 and who have asset earnings of more than $1,800. Also caught in the kiddie tax net are full-time students younger than age 24.

2008 Year-end Money Moves: Taxes

Welcome to Don't Mess With Taxes' second annual Year-end Money Moves series. As December's days dwindle, we'll let you know what you still can do to save or make money in 2008.

We start off with, of course, tax actions you need to tend to by Dec. 31. It will be followed by year-end moves in connection with your investments, retirement and charitable giving, We'll wrap things up with a look some financial housekeeping details.

Some of the strategies cross boundaries. For example, selling assets that have lost value could help lower your tax bill; so does donating to your favorite charity. But we're going to look at these year-end money moves in the upcoming investments and giving postings.

So, without further ado, here's Part 1 of the Year-end Money Moves: Taxes.

Do a dry run
Some surprises are great, but tax surprises usually don't fall into that category. So while there's still time left in the tax year, do a projection of your tax liability. Gather your pay stubs to date and look at your 2007 return to see if your 2008 filing will be substantially the same. Don't forget to count any other income you received or expect to get by year end, such as side jobs or investment earnings.

Adjust withholding
If your review/preview indicates you're going to come up way short on your withholding, head to your payroll office. At this late date, your best move might be having your boss take out a specific dollar amount (you can indicate that figure on the new W-4 you file), rather than changing your number of allowances.

Do an AMT analysis
Your review also should help you determine whether you might have to pay the alternative minimum tax this year. Federal lawmakers once again enacted a short-term patch which will keep millions of taxpayers off this costly parallel tax system's rolls, but that doesn't matter much if you happen to be one of the unlucky ones who still ends up paying the AMT.

Deductions are key considerations when it comes to the alternative tax. Some write-offs that are OK under the regular tax system are not allowed under the AMT. If you find you'll be paying AMT, you don't want to make moves that would push deductions into a tax year where they would be useless.

You can read about 8 ways to escape the AMT tax sting.

Accelerate itemized deductions
If, however, you're going to be paying under the regular tax system, it's generally helpful to accelerate deductions into the current year. You can do this by prepaying some of next year's deductible expenses and deferring income, where possible, until next year. If you itemize, you can bump up your charitable gifts, make your January mortgage payment early to push the interest deduction into 2008 or pay any state estimated taxes this month, too.

Also examine medical and dental expenses. You can deduct those that are more than 7.5 percent of your adjusted gross income; for example, a taxpayer earning $50,000 must come up with medical costs that exceed $3,750. If you're close to your threshold limit, look at ways to get past it: schedule elective medical procedures, buy an extra pair of glasses or contacts, have some dental work done.

Remember, though, to keep the AMT ramifications discussed earlier in mind.

And for the 2008 (and 2009) tax years, homeowners who claim the standard deduction also get a bit of a deduction bonus this year. As mentioned in my post Property tax time for all!, nonitemizers get a chance to write-off at least some of their property tax payments.

Eligible taxpayers can add to their standard deduction amount up to $500 if they are single or heads of households or $1,000 if married filing a joint return. Where the property tax payments are less than the $500 or $1,000 caps, that smaller amount is added to the standard deduction.

So if you don't itemize but do pay property taxes, consider paying your real estate tax bill by Dec. 31 so you can claim a larger standard deduction on your 2008 return.

Take advantage of above-the-line deductions
These expenses, which are claimed directly on Form 1040 or 1040A and don't require you to file a Schedule A, include such things as IRA and Health Savings Account contributions, tuition and fees expenses and some expenses incurred to buy classroom supplies.

You get to subtract those amounts from your income to determine your adjusted gross income (AGI). Lower AGI can help lower your taxable income. True you can wait until April to contribute to an IRA, but the sooner you put money in, the sooner it starts earning. More on this in our retirement moves post tomorrow.

Purchase a hybrid
Tax credits also are available to buyers of hybrid vehicles. If you've yet to get one and want a tax credit to go along with a new Toyota or Lexus hybrid, you're out of luck. That automaker's tax break were zeroed out last year.

Honda's tax credit also is about to vanish. It will be gone on Jan. 1, 2009, so if you want one of that Japanese automaker's hybrids and tax savings, act soon.

Other domestic hybrids, however, still offer a full tax credit amount. their full

You can see just what tax break amounts remain for Hondas here, and for all hybrid and other alternative fuel vehicles here.

Make some financial gifts
We're not talking charity here, but rather the annual gift tax exclusion. For 2008, you can give up to $12,000, of $24,000 if your spouse also wants to be generous, to as many family members and/or friends you want and not owe any gift tax. Such largesse probably would be very welcome in the wake of recent stock market stumbles.

In addition to making you a hero to all your fiscal gift recipients, you also get to take that gifted money out of your estate, helping you lower or eliminate any possible estate tax collections