10 things taxpayers can do before December 31, 2008 to reduce the tax bill due on April 15, 2009
In this troubled economy, tax planning has never been more important, and small businesses and individuals can get started on trimming taxes now, before the end of the year. It has been a bad year for many, so it’s crucial to employ financial strategies that can help alleviate potential IRS increases and minimize tax liability. What I do as a tax resolution specialist is help reduce a client’s IRS debt, which is essentially conducting financial planning in reverse. So I know how important it is for people to know their taxpayer rights in the first place so they can avoid tax trouble as well as save money.
For 2008, savvy income and deduction management can help taxpayers make the most of a bad year. People will also want to consider maximizing annual contributions to retirement plan accounts, using long term capital losses to offset long term capital gains, and taking advantage of popular tax breaks extended for 2008. These days, no one can know for certain what their future income will be like or what direction the financial markets will take. Plus tax rules can change, especially with a new Presidential administration and a new Congress. Therefore the general rule is that the more prepared you are now, the less you will likely owe later when the taxman comes.
So start getting your 2008 taxes ready with these simple tax tips that can help you reduce stress and save money.
1. Accelerate your deductions into 2008. You want to essentially bunch together your deductible expenses into 2008 if you can. For example, if you make state estimated state income tax payments, you can make them on December 31 so you get the deduction (on your federal return) in 2008. You can also charge these expenses on your credit card(s) in 2008, receive the deduction in 2008, even though you won’t be paying for them until 2009.
2. Defer income into the 2009 so you don’t pay taxes on it in 2008. If you’re self-employed or an independent contractor (like a carpenter, electrician, plumber, psychologist, psychiatrist, chiropractor, doctor, etc.) you can do work now in 2008, but not send out the invoices to your customers till January 1, 2009. This is perfectly legitimate and you won’t have to pay taxes on that income till you receive payment in 2009.
3. File your return on time, even if you don’t have the money to pay your tax bill. If you can’t afford to pay your taxes, you can still file your return on time and save 25% on the failure to file penalty right off the bat. What many people don’t understand is that filing an extension just puts off the inevitable, because it’s not an extension of time to pay, it’s just an extension of time to file.
4. Accelerate your medical expenses. If you itemize your deductions, there’s a limitation on medical expenses and you may deduct only the amount by which your medical care expenses for the year exceed 7.5% of your adjusted gross income. So if you have any medical procedures or dental procedures that you’re putting off, now is the time to get them done. You don’t have to pay for them necessarily, you can put them on a credit card and just pay the minimum balance on the credit card, but you can take the full deduction of the year that it took place.
5. Pay you’re an extra’s month’s worth of the mortgage. Make your January mortgage payment in December, so you get can deduct that interest in 2008.
6. Pay your property taxes early. Pay your property taxes that are due in 2009 by the last day of 2008 to accelerate that deduction.
7. Long term capital losses can be used to offset long term capital gains. If you had gains at the beginning of the year and losses now, you can use those losses to offset gains. If you have more losses than gains they can only be used to offset 300 of ordinary income per year. Please keep in mind though that unrealized (not actually sold) losses, especially those in retirement accounts are not deductible.
8. Use gift contributions to lower your tax liability. In terms of gift giving, you can transfer up to $12K per person per year without paying gift tax on the amount transfers. If you have married grandparent, they can give $24K per person by splitting there fist. In 2009, that exclusion rises to $13K each. Persons over the age of 70 1/2 can contribute up to $100,000 from their retirement accounts to a charity of their choice without paying taxes on that income.
9. Maximize annual contributions to retirement plan accounts. This is important because ones year’s limit cannot be added to the next year’s if not taken in time. Now contributions to IRAs may be applied retroactively, if made before the filing deadline and an individual’s elective contribution. As many plan account owners have realized in 2008, it is that managing a tax preferred retirement account is not a “set it and forget it.” Now in 2008 you can deduct up to $15,500 per individuals. If you’re 55 and over, I believe that goes to $20k , and you can have an arrays of different investments in your 401K. As the individual, you can choose the type of asset allocation or risk that you want.
10. Take advantage of tax breaks. The Emergency Economic Stabilization Act of 2008 includes several tax breaks that may offer a little help to the average American. Many of the provisions extend tax breaks that had expired at the end of 2007. Some of the popular tax breaks offer opportunities for tuition deduction, extended write-offs for sales taxes, help for disaster victims and some Alternative Minimum Tax relief.
For more advice and information on reducing your IRS debt, visit www.taxresolution.com for a free tax relief consultation or call 866-477-7762.