As we approach year-end, there is still time to take action to lower your 2009 tax bill and add to your tax -advantaged retirement accounts. Here are a few ideas to get you started before year-end. This is by no means an exhaustive list, so please contact us for additional ideas.
Make the Standard Deduction Work for You. If your itemized deductions are just at or below the standard deduction (currently $11,400 for joint filers and $5,700 for singles), they don’t generate any tax benefit for you. However, you can bunch itemized deductions from two calendar years into a single tax year to take full advantage of them and exceed the standard deduction that year. Then you can take the standard deduction the next year. Following this two-year pattern results in greater deductions overall. Deductions that work well for this strategy include charitable contributions, property taxes, the fourth quarter estimated state income tax payment, and your January mortgage payment.
Consider Selling Appreciated Securities. It may be a good time to consider selling capital assets (e.g., common stock) with a low cost basis. The maximum capital gains tax rate is 15% for gains from the sale of qualifying assets held more than one year. In fact, taxpayers in the 10% and 15% ordinary tax brackets can do even better by taking advantage of the 0% capital gains rate in 2009. The 15% maximum tax rate is available for both the regular and alternative minimum tax (AMT). In addition, qualifying dividends received during 2009 will generally be taxed at the 0% or 15% capital gain rates.
Contribute to Your Traditional or Roth IRA. You can contribute up to $5,000 ($6,000 if you are age 50 or older by year-end) to your IRA in 2009 if certain conditions are met. For married couples, the combined contribution limits are $10,000 ($5,000 each) and $12,000 ($6,000 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income. In addition, contributions to traditional IRAs may be tax-deductible, subject to specific conditions and limitations.
Contribute to Your Employer-Sponsored Retirement Plan. The 2009 annual deferral limit for qualified retirement plans is $16,500. If you are at least age 50 by year-end, you can contribute an additional $5,500 to 401(k), 403(b), and 457 plans. These contributions normally decrease your taxable income and thereby lower your tax bill.
50% Bonus Depreciation. Qualifying equipment, which includes most tangible personal property and software and certain leasehold improvements acquired and placed in use during 2009, is eligible for an immediate 50% bonus depreciation deduction on the remaining balance.
Once again, please call us for additional year-end tax planning ideas or to discuss any tax compliance or planning issue.