2010 Tax Planning Strategies

Posted on December 17th, 2009 in Newsletter Articles, Taxes by wayne

While it is important to execute year-end tax saving strategies to minimize your taxes in 2009, your greatest opportunity for tax savings comes from advanced tax planning before the start of 2010.  There are several areas where advanced planning will provide a significant amount of tax savings in the year ahead.  Here are just a few:

Purchasing a home – Congress has extended the $8,000 refundable tax credit to anyone who closes a “first home” by the end of June 2010.  This “first home” credit applies also to anyone who has not owned a house for the past three years.  If you have a home that you have owned for at least five years, you are eligible for a refundable tax credit of $6,500, as long as your new home costs less than $800,000.  To qualify for either option, income cannot exceed $225,000 for joint tax filers.

A refundable tax credit provides for a full tax refund of either $8,000 or $6,500, even if the taxes that you owe are less than the refund amount.  As an example, suppose that you owe taxes of $5,000 and are receiving a refundable credit of $8,000.  With a refundable tax credit, you pay no taxes at year end and the treasury will send you a check for $3,000.

If you have not owned a home in three or more years or are thinking about moving after living in your home for at least five years, these subsidies can help you buy a new home.  Just be sure to sign a purchase agreement by April 30 and that closing occurs by June 30.

Health Savings Accounts – If you choose a qualified High Deductible Health Plan (HDHP) for your family’s health insurance in 2010, you will be able to make a tax deductible contribution of $5,950 to your Health Savings Account.  Not only are these funds immediately deductible against 2010 income, when you use these funds for future health care, no taxes are due on these funds or their income.

HSAs combine an immediate tax deduction (like an IRA) with the advantage of never paying taxes on these funds (like a Roth IRA), when the HSA funds are used for health care services.  On an after tax basis, HDHP insurance plans, combined with fully funded HSAs are often the most cost effective approach to providing health insurance.

Sales Tax Deduction – For the past few years, Congress has allowed for taxpayers to choose between deducting their state and local income taxes or their annual sales taxes. In states such as Colorado, most people deduct the income taxes.  However, if you are retired or having a low income year, it may be more advantageous to deduct state and local sales taxes instead of income taxes.

My approach is to have a large jar in the pantry into which my wife and I put every receipt with at least $1 in sales taxes.  At the end of the year, you might be surprised to find out how much you pay in sales taxes.  As an example, if you buy $80,000 in taxable items, you pay $6,800 with Colorado’s 8.5% sales tax,.  With Colorado’s 4.64% income tax rate, $145,000 of taxable income is required for the same $6,800 deduction.

IRS provided sales tax tables vastly understate actual sales tax payments.  For the sales tax alternative to succeed, you must save your sales tax receipts.  However, a little effort at the end of the year could save hundreds of dollars in federal income taxes.

Other tax savings approaches include maximizing your retirement plan savings, properly funding your flexible spending account (FSA), gifting strategies, etc.  To get more detail on these and other tax strategies, check out my book, Financial Abundance Guide, which is now available free on my website.

10 Ways to Lower Your 2009 Taxes

Posted on December 17th, 2009 in Newsletter Articles, Taxes by wayne

One of my Seven Steps to Financial Abundance is “minimize your taxes.”  As 2009 draws to a close, there are several ‘to do” list items that can help assure that your 2009 federal and state taxes will be as low as possible. Let’s look at ten actions that could lower your 2009 taxes, if they are performed by December 31.

1.    New Car Purchase – If you were unable to take advantage of “cash for clunkers,” but are still planning on a new car purchase, do it now.  If you buy a new vehicle by December 31st, you can deduct state and local sales taxes from your 2009 federal tax return, regardless of whether you itemize or not.  This deduction applies to the first $49,500 of a new car price and phases out for couples earning over $250,000.
2.    Capital Loss Deduction – Determine if you have realized any 2009 capital gains in your taxable investment accounts.  If so, assuming that the taxable accounts have assets that are valued at less than their purchase price, sell enough of these capital loss assets to have a net realized capital loss of $3,000 in 2009.  This $3,000 capital loss will offset other 2009 income.
3.    401(k) and 403(b) Plans – Maximize your 401(k) and 403(b) contributions before year end.  In 2009, the maximum tax deductible contribution for each plan is $16,500.  If you are over age 50, you may make a “catch up” contribution of $5,500 for a total of $22,000.  If it is too late to increase your allocations for 2009, be sure to sign up for the maximum reduction that you can afford in 2010.
4.    Roth IRA Conversions – If your modified Adjusted Gross Income (AGI) for 2009 is less than $100,000, you may convert IRA holdings into a Roth IRA.  While the AGI limitation will disappear in 2010, if your 2009 income is lower than normal, it may be wise to convert some IRA funds before the end of 2009.
5.    IRA Charitable Contributions – For those over age 70½, 2009 is the last year in which you can make direct charitable donations of up to $100,000 from your IRA.  If you withdrew this money and then gave it to a charity, your AGI would increase, which could trigger future Medicare premium increases.
6.    Charitable Gifts –If you are inclined to help those less fortunate than yourself, charitable giving will help reduce your taxes.  Any tangible items that you donate must be in at least “good” condition.   Keep a detailed list of the items, their condition and the thrift store value of each item.
7.    Set up a Donor Advised Fund – If your charitable gifts are in cash, consider establishing a Donor Advised Fund.  You can donate long-term appreciated capital assets to the Donor Advised Fund and receive a deduction for the full value of the asset.  Not only will you receive a charitable tax deduction, you will never pay taxes on your capital gains.
8.    Defer Income – The self-employed and some small business owners can elect to invoice customers in January, so they don’t have to include this income in 2009.  However, this may only be wise if you will be in the same or lower tax bracket in 2010.
9.    Adjust Medical Deductions – Since medical deductions are limited to expenses exceeding 7½ % of income, if you have already had high 2009 medical expenses, get any tests, eyeglasses, prescriptions or dental work that you may require during 2009.  If your 2009 medical expenses are low, hold off on these expenses (if possible) until 2010.
10.    Prepay mortgages and state income taxes – If your mortgage payment is due January 1, paying it by December 31 will allow you to deduct the interest in 2009.  Prepaying your state income tax by December 31 will also allow the amount paid to be deducted in 2009.

There are other methods of reducing your 2009 taxes, such as IRA and HSA contributions, that do not require action by December 31.  However, the actions listed above must be done by December 31 if you wish them to apply to your 2009 taxes.