It’s the end of the year, what’s a morally conscious investor to do?
In 2009, for many investors there is good news and bad news. The good news is you may have made a ton of money in the stock market recovery. The bad news is you may have to pay some taxes on your gains. What can you do to cut your tax bill? Here are some year-end moves to help reduce your taxes. Please keep in mind, I am not a CPA and you should seek the help of a qualified tax advisor before making any changes.
Last Minute Tips
With all the money Obama has been spending, one thing is almost certain, taxes will go up next year! This means that year-end tax planning for 2009 is more important now than ever! First things first: you will need to get a good estimate of your tax bracket for 2009 and 2010. Here is a resource to help you out: 2009 tax rates, 2010 tax rates. Once you have a good idea on your tax situation you will want to consider some maneuvers to help your situation some.
Here are seven tax moves you can make before the end of the year:
1. Consider maximizing your pretax contributions to your IRA. For an IRA you can contribute $5,000, or $6,000 if you are over age 50 or older.
2. Consider a Roth conversion (converting a traditional IRA to a Roth IRA). Don’t qualify in 2009? Just wait a month! The $100,000 gross income limit on conversions will be lifted next year. If your income is less than $100,000 you may want to consider doing a partial conversion if your tax bracket is going to be higher in 2010.
3. On your taxable accounts, consider taking some short-term gains. Normally I recommend holding securities for a year or longer to get the lower capital gains rate. But with all of the volatility in 2007, 2008, and 2009, chances are you have some winners and losers. Profits on securities held for less than a year are treated as ordinary income (up to 35% in 2009). You can use net short-term losses to offset net-short term gains and avoid having to pay taxes on some of your winners.
4. On your taxable accounts, consider taking long-term gains. Securities that have been held greater than a year can also be paired (winners and losers). If you have current long-term gains, chances are high that the favorable 15% capital gains rate that is currently in effect will go away.
5. Consider taking some losses now. Losses offset gains dollar for dollar. You can use up to $3,000 of net losses toward your 2009 ordinary income. Any additional losses can be carried into 20010 and possibly beyond.
6. Consider purchasing a vehicle. Doing so before the end of 2009 could carry some tax benefits. You can deduct the state and local sales and excise taxes on new cars, light trucks, motor homes, and motorcycles bought within 2009. Taxes paid on the first $49,500 of the cost qualify without any limitation on the number of vehicles you can buy.
7. Consider year-end business purchases. Business owners with self-employment income can purchase up to $250,000 worth of business equipment and take a full tax deduction in 2009. To qualify, the equipment must be in service by year-end.
These are just a sample of the many tax moves you can do in 2009. Time is running out! Call your tax advisor today to see if any of these may be of advantage to you. Chances are there is always a move or two waiting for you to save some money on your taxes.
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If you’ve made improvements to your home this year like new windows, water heaters, roofs or other things, you may be eligible for home improvement tax credits. Check it out at energystar.gov to find out if you’re eligible. If you are you can claim up to a $1500 credit on your taxes in 2009 or 201o if the improvements are made next year!
I am working on seeing if I can move some money around to maximize my Roth IRA for the year, good tip.
Thanks for the post, Jay! We’re thinking about year-end charitable contributions—asking ourselves, who can we bless at this time of year?
Great tips! I’m hoping that I can contribute a nice chunk of change to our Roth IRAs!
If you sell stocks that have long term gains you should also consider selling stocks that have long term losses to offset the capital gains due on the winners you are selling.
With market performance being what it has been the last couple of years, it is very likely that most of us have losses to off set any gains. Just make sure you understand the wash rule when you do sell them.
The wash rules basically states that you cannot re-purchase that same or identical stock within 30 days or the original sale is a wash. So if you really like the stock, sell it now and re-purchase it after the wash rule time frame has passed. (Verify the 30 days as I am quoting that from memory
I am also hoping that we can start to rebuild our retirement savings this year. They have taken a pretty hard hit over the last year or two.
On the subject of leveraging your home, I would add that some people are able to avoid more taxes with a home equity line of Credit(HELOC). I am not an accountant so talk to yours about business deductions from the HELOC. If you are also a business owner, running much of your expenses “through” a HELOC is a form of financing that can give you additional deductions at the end of the year without costing you any inconvenience.