Every Thanksgiving many people look for ways to reduce their taxes by year end. Reducing your taxes is accomplished by minimizing taxable income (deferring income and/or accelerating deductions) and maximizing tax credits. Taxpayers who believe an increase in rates for 2010 is inevitable may want to maximize 2009 income and minimize 2010 income to the extent possible. Assuming though you wish to employ traditional tax planning techniques and reduce your 2009 taxes, there are some options you may want to consider before year end.
Legally deferring income to 2010 can result in a double benefit. Not only do you delay paying tax on the deferred income, a lesser Adjusted Gross Income (AGI) means exclusions like IRA contributions, deductions limited by AGI, like medical expenses and credits, like education credits also limited by AGI can be greater. One cannot simply tell their employer to delay salary until 2010, nor can self employed individuals unilaterally wait until 2010 to deposit receipts. There are though legal ways to reduce AGI.
Self employed individuals can legally reduce their AGI by doing such things as accelerating purchases necessary to their business. They should seek to time the purchase of equipment such as computers in order to maximize the section 179 deduction which allows immediate expensing of otherwise depreciable assets. The self employed should also consider maximizing retirement plan contributions, which may require adopting a profit sharing, 401 (k) or SEP plan by year end. Wage earners should also plan to maximize their 401 (k) contributions by year end.
All taxpayers potentially can reduce AGI by making sure they recognize realized capital losses. Capital losses can offset capital gains in full. In addition, losses greater than gains up to $3,000 can offset any other type of income. Retired taxpayers over age 70 ½ do not have to take (and pay tax on) required minimum distributions in 2009. Despite the publicity concerning this issue, it is surprising many taxpayers are unaware of this opportunity.
This may also be the time to revisit your flexible spending account, especially if your employer requires you to spend your account by year end. You may also want to consider increasing your contribution for next year at this time. You may also want to examine your medical expenses at this time in order to maximize the 7.5% of AGI threshold either in 2009 or 2010.
The timing of charitable contributions can result in a tax planning opportunity. You may be able to satisfy a pledge early, or prepay contributions you would normally make in 2010 before year end. As always, consider donating appreciated stock to your charity and avoid the capital gains tax. To the extent you have a significant state tax liability for 2009, but due on 4/15/2010, consider paying by year end to get a 2009 tax deduction. Be careful to consider the alternative minimum tax implications.
At this point in the year, the first time home buyers tax credit is probably not available. However, if you were planning to buy a car soon, you still have time to purchase a new car before year end and perhaps deduct the sales tax. Finally, make sure you tax advantage of tax credits before year end, especially credits available to make your home more energy efficient.
Legally deferring income to 2010 can result in a double benefit. Not only do you delay paying tax on the deferred income, a lesser Adjusted Gross Income (AGI) means exclusions like IRA contributions, deductions limited by AGI, like medical expenses and credits, like education credits also limited by AGI can be greater. One cannot simply tell their employer to delay salary until 2010, nor can self employed individuals unilaterally wait until 2010 to deposit receipts. There are though legal ways to reduce AGI.
Self employed individuals can legally reduce their AGI by doing such things as accelerating purchases necessary to their business. They should seek to time the purchase of equipment such as computers in order to maximize the section 179 deduction which allows immediate expensing of otherwise depreciable assets. The self employed should also consider maximizing retirement plan contributions, which may require adopting a profit sharing, 401 (k) or SEP plan by year end. Wage earners should also plan to maximize their 401 (k) contributions by year end.
All taxpayers potentially can reduce AGI by making sure they recognize realized capital losses. Capital losses can offset capital gains in full. In addition, losses greater than gains up to $3,000 can offset any other type of income. Retired taxpayers over age 70 ½ do not have to take (and pay tax on) required minimum distributions in 2009. Despite the publicity concerning this issue, it is surprising many taxpayers are unaware of this opportunity.
This may also be the time to revisit your flexible spending account, especially if your employer requires you to spend your account by year end. You may also want to consider increasing your contribution for next year at this time. You may also want to examine your medical expenses at this time in order to maximize the 7.5% of AGI threshold either in 2009 or 2010.
The timing of charitable contributions can result in a tax planning opportunity. You may be able to satisfy a pledge early, or prepay contributions you would normally make in 2010 before year end. As always, consider donating appreciated stock to your charity and avoid the capital gains tax. To the extent you have a significant state tax liability for 2009, but due on 4/15/2010, consider paying by year end to get a 2009 tax deduction. Be careful to consider the alternative minimum tax implications.
At this point in the year, the first time home buyers tax credit is probably not available. However, if you were planning to buy a car soon, you still have time to purchase a new car before year end and perhaps deduct the sales tax. Finally, make sure you tax advantage of tax credits before year end, especially credits available to make your home more energy efficient.
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