Year-end moves to trim your tax bill

The holidays -- a season of giving and joy -- are almost here. It's also your last chance to cut your 2008 taxes. (Keep those receipts when you give to charities!)

By Jeff Schnepper

Yes, it's November. The holidays are nearly here. And my gift to readers is a gentle reminder to make those last-minute tax moves.
I say this every year: Your tax planning for your 2008 return should have started last December. Still, there are things you can and should do before Dec. 31 to trim your 2008 tax bill.
Let's start with the simple things.
The easy stuff

Charitable donations. If you contribute to your church, your college, the local dog pound, United Way, organizations that help with disaster relief or whatever, make these donations before Dec. 31.

And make sure, before you file your tax return, that you have a receipt from the organizations that benefited from your generosity. Picture dead presidents on the receipt. It represents real money in your pocket.

If you don't have the cash, find out whether the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it's valid as a 2008 deduction, even if you don't pay the bill until next year.

Separately, any contributions of clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, an appraisal is now required. The Internal Revenue Service can deny a deduction for items of minimal value.
Complicating any deductions are new requirements on record keeping. This is important.

To deduct a cash donation, regardless of the amount, you must have a bank record or a written communication from a charity that shows the charity's name and the date and amount of the contribution. Acceptable bank records include canceled checks or bank or credit union statements.

So, if you're just putting cash in the collection plate, you're making a donation, but it's not deductible. Use either a check or an envelope where you can get a receipt later.

Talk back: What money moves do you plan to make by Dec. 31?

Your flexible spending account, or FSA. This isn't exactly a tax savings, but if you don't use the dollars you contribute to a flex plan, you lose them.
The IRS allows purchases made up through March 15, 2009, to count. Your employer can give you a debit card for your FSA spending. You can even pay for nonprescription drugs through an FSA. That eliminates a whole lot of paperwork.
Be careful, however. Unless your employer's plan also is amended to allow the March 15 extension, you won't qualify.

Mortgage interest. Make your Jan. 1 mortgage payment by Dec. 31. Remember to add the extra interest paid to what your bank reports on its Form 1098 -- it'll get your payment in 2009 and won't report it for 2008. But you paid it then, so it adds to your deduction this year. (The downside is that you won't be able to deduct the payment from your 2009 return.)


Jared Bernstein of the Economic Policy Institute and Republican strategist Jack Burkman discuss the effect of the economy on the president-elect's tax plans.

Real-estate taxes. If you pay your own real-estate taxes, make any payments due in the beginning of 2009 by Dec. 31. My fourth-quarter real-estate tax is due Feb. 1. By paying before the end of 2008, I can get the deduction a year earlier. (Again, you can't deduct payments made in 2008 from your 2009 return.)

A friendly warning: Taxes aren't allowed as a deduction under the alternative-minimum-tax computation. If you think you will be hit by the AMT, don't prepay.
A happy note: Beginning this year, you can increase your standard deduction by as much as $500 ($1,000 on a joint return) in property taxes paid.

Medical and miscellaneous deductions. These have "floors." For medical expenses, only those in excess of 7.5% of your adjusted gross income count. Miscellaneous itemized expenses have to exceed 2% of your AGI to qualify.
Your health insurance premiums count so long as you're not paying them out of a flexible spending account.

If you're going to exceed the floor, accelerate your expenses. Prepay your orthodontist or your tax preparer. Mail your checks on or before Dec. 31. Alternatively, if you're not going to exceed your floors, defer the deductions to 2009. You may exceed your floors then.

Pension or IRA contributions. These are especially important if you are self-employed. Unless you expect tax rates to shoot up, you want to pay your tax "tomorrow" rather than today.
If you're contributing to a retirement plan such as a 401(k) or a 403(b), you can put in $15,500 this year and $16,500 in 2009. If you're 50 or older, you can put in an additional $5,000 ($5,500 for 2009) as a catch-up contribution.

Cash gifts. If you might ever be subject to the estate tax, make your $12,000 tax-free gift ($13,000 for 2009) before the end of the year.

Capital gains and losses. 2008 has been a wacky, volatile year for investors. "Volatile" is a technical term for "Oh, my God! What happened to my money?!"
If you have capital gains, remember that any net capital losses over the $3,000 allowed on your 2007 tax return should be carried forward to offset those 2008 gains. If you still have net losses, up to $3,000 may be used to offset ordinary income for 2008.
All net long-term gains are subject to a maximum 15% rate. If you're in the 15% or lower tax bracket, your tax hit this year is now zero!

Talk back: What money moves do you plan to make by Dec. 31?

If you're single with taxable income of $32,550 or less, you get the 0% rate. With a standard deduction of $5,450 and a $3,500 personal exemption, you can have as much as $41,500 in gross income and still qualify.

If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income. If you have shares of stock pregnant with gains and you don't expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case: Pay the maximum 15% tax. You can't go broke taking profits.

I fully expect some relief on the alternative minimum tax. Then again, I also believe in Santa Claus and the tooth fairy. And if we don't get AMT relief, I encourage you to really yell at your representative and senators for not getting the job done.

More and more middle-income taxpayers are being hit with the AMT each year, which is basically a parallel tax system designed to ensure that everyone pays some tax. It is, however, forcing too many people to pay more tax than they should.

Last year, Congress extended the AMT exemption, increasing the exemption to $69,950 in taxable income for married couples filing jointly and $46,200 for single taxpayers.

Jared Bernstein of the Economic Policy Institute and Republican strategist Jack Burkman discuss the effect of the economy on the president-elect's tax plans.
Tax-free IRA distributions to charities

If you're 70 1/2 or older and looking to make a donation to a favorite cause by using funds from your individual retirement account, this may be the year to do it. For 2008 and 2009, you can still distribute as much as $100,000 directly from your IRA without recognizing any income.

You don't get a charitable-donation deduction (unless the distribution was from a Roth IRA), but the distribution does count toward your minimum-distribution amount.
Published Nov. 12, 2008