As the clock ticks down on calendar year 2009, don’t forget to use these last minute tips to reduce your income taxes:
Review realized and unrealized gains and losses. From the stock market peak in 2007 to its bottom on March 9, 2009, the market lost more than fifty percent. However, since the March 9 bottom the stock market is up over sixty percent. With this wide range of volatility, now is a great time to review your investment accounts. Figure out your net ‘realized’ gains or losses based on sales you’ve already made this year. If the net result is a loss, you can take up to a $3,000 deduction against ordinary income. Any excess losses can be carried forward and used in future tax years. If your losses are less than $3,000, consider selling other securities with losses to maximize the $3,000 deduction. If the net result is a gain, consider selling enough shares with losses to offset your gains, particularly if your gains are short-term which will be taxed as ordinary income versus long-term capital gains rates (15% federal).
Make your January home mortgage payment by year-end. By paying your January mortgage payment in late December, you’ll get to deduct an ‘extra’ months worth of interest this year.
Claim a tax deduction for a new car purchase. While the Cash for Clunkers deals are no longer available, the federal stimulus package offers tax incentives for the purchase of a new vehicle bought between February 17 and December 31, 2009. Under this temporary law, you are allowed to deduct the state and local sales and excise taxes on the purchase of new cars, light trucks, motorcycles and motor homes. The amount of the deduction is limited to the amount of taxes paid on the first $49,500 of the purchase price and the deduction is phased out for taxpayers filing a joint tax return whose modified adjusted gross income (MAGI) is $250,000-$260,000 and single filers whose MAGI is $125,000-$135,000.
Don’t panic over Required Minimum Distributions from your IRA. Normally, if you are age 70½ or older, you are required to take a minimum distribution from your IRA account each year. For calendar year 2009, the government has waived this requirement. Use this as an opportunity to defer the income taxes on retirement account distributions for an additional year.
Give to charities. Don’t forget that gifts of cash, securities, clothing and other personal items to charities are deductible. With an estimated fifty million people either out of work or facing severe financial stress, it’s more important than in any time in recent history that we support the charities that support those in need.
Contribute to your retirement account. If your company offers a 401k plan, you still have time to up your contribution and receive a tax deduction this year. Contact your Human Resources Department for help. You’ll have until April 15, 2010 to make a tax deductible contribution to your IRA account.