Friday, December 5, 2008

More Year End Planning Part 3

Make a charitable transfer:
Individuals who are at least 70½ years old can also make a tax-free transfer from their IRA of up to $100,000 to a charity, as long as the transfer is direct to the organization. This can be useful for retirees who must take required minimum distributions from an IRA, but since the money goes untaxed, donors do not get to deduct the contribution.

Prepay bills: Prepaying things such as January's mortgage bill, a child's spring semester tuition, local property taxes or state income taxes and even tax-advisory and preparation fees can help drive up the amount of deductions you can itemize.

  • Prepay Deductible Expenditures: Early payments for some deductible expenditures that are made this year -- instead of in early 2009 -- will produce higher write-offs for your 2008 tax return. This strategy makes sense if you expect to be in the same or lower tax bracket next year. Of course, that’s a big "if," but let’s assume it’s the case. Monthly mortgage payment Perhaps the easiest expense to prepay is your house payment due Jan. 1. By paying it this year, you'll have 13 months' worth of mortgage interest to write off for 2008. You can pull the same prepayment trick with a vacation home. By prepaying this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll only have 11 months of interest to deduct for the first year you stop.

  • State and local income and property taxes: Prepayment of state and local income and property taxes that aren't actually due until early next year can also generate a larger 2008 deduction. Thanks to a new tax-law provision, even non-itemizers can deduct real property taxes paid during 2008. However, the maximum write-off under the new rule is $1,000 for married joint-filing couples and $500 for others and the deduction cannot exceed the amount you actually pay by year's end. Do not do these prepayment drills if you know you’ll owe the dreaded alternative minimum tax (AMT) for this year. Write-offs for state and local income and property taxes are completely disallowed under the AMT rules. Therefore, prepaying these expenses will do little or no tax-saving good for AMT victims.

  • Medical expenses and itemized deductions: Also, consider prepaying expenses that are subject to limits based on your adjusted gross income (AGI). The two prime candidates are unreimbursed medical expenses and miscellaneous itemized deductions. Medical expenses are deductible only to the extent they exceed 7.5% of AGI. Miscellaneous deductions for investment expenses, tax preparation fees, tax advice, and unreimbursed employee business expenses are deductable to the extent they exceed 2% of AGI. If you can combine these expenditures into a single calendar year, you’ll have a fighting chance of clearing the AGI hurdles and getting some write-offs. Unfortunately, this strategy may not work for AMT victims. Under the AMT rules, medical expenses must exceed 10% of AGI to be deductible and miscellaneous itemized deductions are completely disallowed.

  • Prepay College Tuition: If your 2008 adjusted gross income (AGI) allows you to qualify for the Hope Scholarship or the Lifetime Learning higher education tax credits, consider prepaying college tuition bills for 2009 if that would result in a bigger credit on this year’s 1040 form. Specifically, you can claim a 2008 credit based on prepaying tuition for academic periods that begin in January through March of next year. If your 2008 AGI is too high to be eligible for the Hope or Lifetime credits, you might still be able to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills for academic periods that begin in the first three months of 2009 if that would result in a bigger write-off on this year’s Form

Business expenses: Smaller items also add up, so restocking work-related supplies, renewing subscriptions to professional journals or prepaying dues for professional organizations can also help reduce taxes.

Medical expenses: Review your medical bills to see whether the total spent is close to 7.5 percent of adjusted gross income. If your expenses are at or near that threshold, it might make sense to have other elective work done or prepay some expenses to take advantage of that deduction.

Make a gift: The law also allows taxpayers to deduct gifts of up to $12,000, or $24,000 for a married couple filing a joint return. What's more, there's no cap on gift deductions for educational and medical expenses if the payments are made directly to the educational organization or medical provider.

Think alternative energy or hybrid: Finally, there are tax credits available for several energy-saving investments, including installing alternative energy devices such as solar panels, fuel cells or wind turbines to provide electricity for a home, and for buying alternative fuel vehicles. There are tax credits available for the purchase of a hybrid or electric car. A list of the credits available for different models is available on the Internal Revenue Service Web site,

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