2008 Year-end Money Moves: Taxes
Tuesday, December 02, 2008
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.
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
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