15 December 2008
By Patricia Kitchen
Today's financial meltdown may lead some taxpayers to put off worrying about taxes until next year. But by taking some steps this month, they can make April an easier time to handle.
"You should be thinking about this now," said Andrew Rich, a fee-only investment adviser in Plainview. "On Jan. 1 there's very little you can do."
Here's what he and other experts recommend:
"Harvest" your tax losses
The bad news is that so many people saw investment losses this year. While financial planners advised resisting the temptation to sell because they lock in the losses, investors can "make lemonade out of lemons" by selling that stock or mutual fund, but immediately reinvesting in something similar, said Ray Mignone, a fee-only financial planner in Little Neck. This way they "harvest the loss" and get the tax advantage, while staying in the market.
If the booked losses are greater than any capital gains they may have received, taxpayers can reduce their regular taxable income amount by up to $3,000 a year.
Surpass the threshold
Taxpayers can deduct medical spending only when it's above 7.5 percent of their adjusted gross income - that's income after some deductions, including individual retirement account contributions or moving expenses. So, if you're close to that percentage and can pay a health care bill this year instead of next, you can deduct whatever amount is above the 7.5 percent, Rich said.
Likewise in the miscellaneous tax category, people can start deducting once they've topped 2 percent of their adjusted gross income, he said. This category includes payments for tax and investment advice, job search and career development, unreimbursed employee expenses and certain legal fees. Go to irs.gov for more details.
Prepay state and local taxes
The next installment for those who estimate such taxes is due Jan. 15, Rich said. But, if you prepay by the end of this month, you get the deduction this year instead of next.
For instance, he said, if a taxpayer prepays a state tax payment of $1,000, he or she will be able to deduct that amount come 2008 tax filing time. Assuming the person is in the 25 percent tax bracket, that amounts to a $250 savings on his or her 2008 federal taxes.
Make charitable donations
Things may be tough, but you can do good and get a tax break by helping those "who have it even tougher than you," said Jackie Perlman, senior researcher at the Tax Institute at H&R Block in Kansas City, Mo.
Contributions to eligible organizations made by Dec. 31 can be deducted - but that does not go for unpaid pledges. For donations under $250, you'll want verification such as credit card receipt or written acknowledgment from the charity. For contributions $250 and over, you must produce the charity's written acknowledgment, if the IRS should ask.
Learn more at hrblock.com under tax tips, overlooked credits and deductions. For clothing/items, check valuation guidelines at the Salvation Army (salvationarmyusa.org).
Claim education credits
Even if you don't itemize, you can get tax breaks, such as claiming an education credit for the cost of your child's college tuition paid in 2008, Perlman said. Credits lower your tax bill dollar for dollar. She cited an IRS statistic saying the average education credit claimed in 2006 was $909. Also, adults going back to school may be eligible for a lifetime learning credit, she said. Such a credit can be worth up to $2,000 for qualified higher education expenses.
Learn more at hrblock.com under tax tips, overlooked credits and deductions.
Don't overpay
Estimated income tax payments made quarterly are based on what taxpayers paid the previous year. But, "last year people had a lot of taxable gains and mutual funds paid out big distributions, so they paid a lot of tax," Mignone said.
That's not the case this year thanks to these difficult economic times. So he advises those who estimate to check with tax advisers to see whether they need to make the final 2008 payment, which comes due Jan. 15 - since their tax may be lower than anticipated. "The range of estimated payments could be $1,000 to $25,000 per quarter for middle -class taxpayers," he said. "You could use that money to pay off holiday bills.