The Emporia Gazette

February 14, 2012

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As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes — both on your 2009 return and in future years. The federal income tax environment is very favorable right now, but it is not likely to continue much longer. Now is the time to take advantage of the tax breaks that Congress has provided before they disappear.

Increasing

deductions

One way to reduce your 2009 tax liability is to look for additional deductions. Here’s a list of suggestions to get you started:

Make charitable gifts of appreciated stock. If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares.

Maximize the benefit of the standard deduction. For 2009, the standard deduction is $11,400 for married taxpayers filing joint returns. For single taxpayers, the amount is $5,700. Currently, it looks like these amounts will be about the same for 2010. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years. For instance, you might consider moving charitable donations you normally would make in early 2010 to the end of 2009.

Bunch deductions subject to an Adjusted Gross Income limit. Miscellaneous itemized deductions (such as unreimbursed employee business expenses) are deductible to the extent they exceed 2 percent of your Adjusted Gross Income. Medical expenses are deductible only to the extent they exceed 7.5 percent of AGI. To lessen the affect of these AGI limitations, try to bunch your miscellaneous and medical expense deductions into every other year.

Purchase certain big ticket items in 2009. Thanks to a couple of expiring temporary tax breaks, it may pay to purchase certain big-ticket items before the end of the year:

F The optional itemized deduction for state and local sales and use taxes (in lieu of deducting state income taxes) will expire at the end of this year unless Congress takes further action. Therefore, if you live in a state with low or no state income tax and plan on making big-ticket purchases (such as a car, boat, or motorcycle, or airplane) in the near future, you may want to go ahead and make the purchase this year to cash in on the expiring sales tax break for 2009.

F If you live in a state with high state income taxes and plan on deducting state income taxes instead of state sales taxes this year, legislation passed earlier this year created a one-year federal income tax deduction that might interest you. For 2009, you can deduct state and local sales and excise taxes on purchases of new (not used) passenger autos, pickups, and SUVs, as well as motorcycles and RVs made between Feb. 17 and Dec. 31, 2009. The write-off is limited to the amount of taxes on the first $49,500 of purchase price.

Ideas for

investments

Harvest capital losses. If you are sitting on some investments that have dropped in value since you acquired them, now might be a good time to dump part or all of them to cut your tax bill. You can deduct capital losses up to the amount of any capital gains that you’ll have for the year (for example, from mutual fund distributions or sales of stocks or bonds). Also, you can claim up to an additional $3,000 of losses ($1,500 if you’re married but filing a separate return) against your other income. Any losses in excess of these amounts carry over to next year.

Take advantage of 0 percent capital gains rate before it is too late. For 2009, the federal income tax rate on long-term capital gains and qualified dividends is 0 percent when they fall within the 10 percent or 15 percent regular federal income tax rate brackets. This will be the case to the extent your taxable income (including long-term capital gains and qualified dividends) does not exceed $67,900 if you’re married and file jointly ($33,950 if you’re single). This 0 percent rate will likely continue to apply in 2010, but is scheduled for repeal in 2011.

Although your income may be too high to benefit from the 0 percent rate, you may have children, grandchildren, or other loved ones who can. If so, consider giving them some appreciated stock or mutual fund shares, which they can then sell and pay 0 percent tax on the resulting long-term gains. As long as the gift recipient is in the 0 percent or 15 percent regular tax rate bracket, the dividends will be federal-income-tax-free.

Secure a deduction for nearly worthless securities. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. To avoid the issue, it may be easier to just sell the security if it has any marketable value. As long as the sale is not to a close family member, this allows you to claim a loss for the difference between your tax basis and the proceeds .

Ideas for seniors

Make charitable donations directly from your IRAs. If you’ve reached age 70 1/2, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to the public charity of your choice (such as your church or other favorite charity). Be careful though — to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity (you can’t receive cash and then donate it). Also, this provision expires at the end of 2009 unless Congress extends it. So, this could be your last chance.

Don’t take your minimum required distribution for 2009. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount not withdrawn. A temporary tax law change made in late 2008, however, waives the minimum distribution requirement for 2009. This waiver applies to IRAs and defined-contribution plans, including distributions from 401(k), 403(b), and state-sponsored 457(b) accounts and is available to everyone regardless of their total retirement account balances.

Environmentally friendly ideas

Make energy efficiency improvements to your home. A great way to cut energy costs and save up to $1,500 in federal income taxes this year is to make energy efficiency improvements to your principal residence. Basically, if you install energy efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers or advanced main air circulating fans to your home during 2009 or 2010, you may be entitled to a tax credit of 30 percent of the purchase price, up to a maximum credit of $1,500.

Purchase a qualifying hybrid or lean burn technology vehicle. If you have been considering purchasing a new hybrid or lean-burn technology vehicle, now may be a good time to do so. Not all 2009 purchases qualify as credits are phased out. Make sure you find out if the vehicle you’re interested in still has credits available.

With a little effort and some careful planning, it’s possible your 2009 tax liability can still be significantly reduced. We’re available to assist you in this planning process any way we can. Please don’t hesitate to contact us with questions or ideas on reducing your tax bill.