The calendar just flipped to November, which means the holidays are fast approaching. I don’t know about you, but for me it seems like the year is practically over once Thanksgiving hits. My holiday season will be full with travel and a newborn at home, so I thought now would be a good idea to look at some end of year tax planning.
End of year tax planning
There are several new ways to save on taxes this year due to the personal tax breaks in the economic stimulus packages passed by Congress earlier this year. Some of these include exemption from the first $2,400 of federal unemployment compensation benefits, extended COBRA benefits, AMT relief, and more.
Retirement contributions.
You can make tax deductible retirement contributions that will lower your taxable income.
- Maximize 401k contributions. Calculate how much you have left under your 2009 401k contribution limits and determine if you can increase your contribution through work. This scan be a great move if you can work it into your budget.
- Traditional IRA contributions. You can deduct up to $5000 if you qualify. Here is more information about 2009 IRA contribution limits.
- Self employed retirement plan contributions. Several self-employed retirement plans are tax deductible, including SEP IRA, Solo 401k, SIMPLE Plan, and Keogh Plan.
Of these plans, you can contribute to the Traditional IRA, SEP IRA, SIMPLE Plan or Solo 401k after January 1st. So you should focus your contributions toward maxing out your retirement plans that must be funded by the end of the year, such as your 401k, 403b, Thrift Savings Plan (TSP), or similar retirement plans. Then focus your retirement contributions on any retirement plans that allow you to max out your retirement contributions in the following calendar year. Here are more year end retirement plan tips.
First Time Home Buyer Credit.
Earlier this year Congress passed a credit for first time home buyers good for up to $8,000. To be eligible for the credit in 2009 you must not have purchased a home within the previous three years and you must meet income requirements (the credit phases out for some high income earners). The credit does not have to be paid back, but the home must be your principal residence and you must close on the purchase before December 1, 2009. There have been talks in Congress regarding extending the first time home buyer credit, but nothing is official at the time of this publication.
New-car sales tax deduction.
New car buyers may be eligible to write off state and local sales tax from a new car purchased in 2009. Single tax filers who earn less than $125,000 and joint filers who earn less than $250,000 are eligible. This is an above the line tax deduction which means you don’t even need to itemize your taxes to take advantage of this tax deduction. Eligible vehicles include new cars, motorcycles, light vehicles, and RV’s.
Buy an energy star appliance.
This year there are special rebates for Energy Star rated appliances. These programs are federally funded, but the money and rebates are being handled by the states, so the details may vary. Eligible appliances include heat pumps, furnaces, central and window air conditioners, refrigerators, freezers, dishwashers, washing Machines, and water heaters. The amount of the rebates varies between $50 – $200 per item and you do not have to turn in an old appliance like one had to turn in an old car with the Cash for Clunkers program.
Business deductions
If you own a business, you may be able to deduct eligible expenses. If you haven’t been categorizing your expenses, now is a good time to go through your receipts and categorize them based on type of expenditure. You can also look at your expense forecast to see if there are any purchases you can make before the year end to increase the amount of deductions you can take. You should also look at depreciation schedules, some of which have changed for this tax year. This is an area where hiring an accountant can really pay off.
Other year end tax deductions and tips
- Harvest tax losses. You can write off investment losses
- Donations. You can make tax deductible donations to eligible charities and non-profit organizations. Be sure to avoid charity scams and determine which charities are legitimate before giving your hard earned money.
- Avoid capital gains taxes. Wait until after the New Year to sell investments for gains – postponing your taxes for a full calendar year.
Every tax situation is unique
The focus of this article is to share a few ways you can prepare for your taxes before December 31st rolls around. This article isn’t designed to be a full blueprint for tax planning as it only covers a small percentage of the available tax deductions. Most tax software programs, such as TurboTax and TaxCut should include these deductions when you file next year, but it also doesn’t hurt to start now. You may also consider meeting with a tax professional for more advanced tax planning.
{ 9 comments… read them below or add one }
Hi Patrick,
Thnx for the list. Just wondering if you incorporated yourself or a company to include the income from this site? I ask mainly b/c of the expense write-offs.
I can’t seem to write ANYTHING off, other than my mortgage interest b/c of my income level. I figure if one incorporates their side business and separates it from their other working income, that is the way to capture the expense deduction?
Thnx,
FS
Yes, I incorporated, but you can still write off business expenses for a sole proprietorship. From what I understand, you should be able to write off any associated expenses so long as you are trying to make a profit with your business.
And yes, you should separate your personal and business expenses. It makes it easier to track profits, losses, and expenses, and can help prove your business is a separate entity from your person.
* Note, I am not a tax professional, so please seek the advice of a pro for any specific tax issues.
Sounds good P. I’ll definitely be talking to a tax pro this season. Thnx!
There was a news story just the other day that stated the first time home buyers credit has been extended until this summer but no verification yet.
Steve, I’ve read about the possibility of an extension, but I still haven’t seen the final word. I’ll be on the lookout though.
Patrick-
Good post and good advice.
However you do make an error that many financial writers do when writing about taxes. You say, “You may also consider meeting with a CPA for more advanced tax planning” when you should say, “You should consider meeting with a tax professional for more advanced tax planning”.
Just because a person has the initials “CPA” after his/her name does not necessarily mean that he/she knows his arse from a hole in the ground when it comes to preparing 1040s.
In my 38 tax seasons I have found more errors made by CPAs than by individuals who prepare their own taxes.
The only initials that mean anything when it comes to taxes are “EA” for “Enrolled Agent”.
TWTP
Thanks, Robert. I corrected the article to reflect that wording.
Patrick-
I, and my fellow “non-initialed” tax professionals, thank you!
TWTP
I like the different retirement plans that you listed for the self-employed. Very early on I have thought about contributing towards a retirement plan, but got sidetracked and now I’m not sure if this is a wise idea with the current economic state.