Get ahead of the tax man

Having a baby before 2010 arrives could save you thousands in taxes.

Updated: May 2, 2013 5:22PM

The last weeks in December provide an even better opportunity than

early April to re-organize your financial life -- if you can -- to save

money on your tax bill next spring.

One thing is sure: Income taxes are going up in the future. Some

changes may not hit until 2011, after the year-end expiration of the

Bush tax cut plan. Others will take place during the year, as Congress

trades favors to extend some of those previous cuts. The likely places

to look are the estate tax and the tax on dividends.

But if Washington keeps spending -- on both sides of the aisle --

they'll have to pay for it somehow. Don't look now, but all those

fingers are pointing at you. So take these tips to heart, because next

year is certain to provide many changes.

Have a baby now!

If you're already pregnant and deliver before Dec. 31 ends, it could

save you thousands of dollars on your tax return! Babies born before

the new year rings in at midnight Dec. 31 provide a $3,650 tax

exemption when parents file their return next April.

Plus, lower income families may get a child tax credit of up to

$1,000 per child -- refundable if they have no income tax liability.

And the baby may also generate the Earned Income Tax Credit -- a

refundable credit for low-income workers, with the amount depending on

their earnings and the number of children they have.

One more thing: Even if baby doesn't arrive before the stroke of

midnight, proud grandparents and parents can open a 529 college savings

plan this year, naming the baby as beneficiary when it arrives next

year. You don't get a federal tax break for the contribution, but many

states, like Illinois, do give a break on state taxes for contributions

up to $10,000.

Organize your income

For those who get a regular paycheck, the taxes will depend on the

year in which the income is paid -- not on when you deposit the check!

That income will be included in the W-2 form you receive in January.

But independent contractors or small businesses taxed as

individuals, there may be a choice of when to bill for, and receive,

income. Traditionally, the idea has been to defer income to future

years while taking deductions this year, in order to reduce your tax

bill. But if you expect income taxes to rise, or deductions to

disappear, you might want to reverse that process -- and take income

now, before year-end.

Of course, you'll want to check with your accountant on this,

because accelerating income this year may disqualify you from certain

tax credits -- such as deductions for "green" home improvements -- or

it may be enough to move you into a higher tax bracket. Check the tax

calculator at the Web site of H&R Block (www.hrblock.com) to help figure out the impact of your moves.

Consider deductions

To lower your income this year, make charitable contributions now.

That's not only tax-wise, but desperately needed by hard-hit charities

this year. Remember, for gifts over $250, the organization must give

you written acknowledgment. And you'll also need an appraisal for any

donated items, such as clothing or household goods.

Prepay your property taxes before Dec. 31 to get the deduction this

year. If you're paying tuition and eligible for programs like Lifetime

Learning Credit or Hope Credit, or if you qualify for tax deductions

simply for higher education bills, consider paying those bills in

December, to qualify for the credit on your tax return next April.

Stock losses count

If you have a stock loss outside your retirement account, taking it

now could offset taxes on up to $3,000 of ordinary income -- and you

can carry unused losses forward for future years. Or you could sell

some stocks at a profit, and offset those profits by selling others at

a loss. Just remember that profits on stocks held longer than a year

are taxed at a very favorable capital gains tax rate -- a rate that may

or may not be around in 2010.

Don't take IRA withdrawals

Remember, this is the year that you are not required to

withdraw a minimum distribution from your IRA if you don't need the

money and would rather keep it invested. Avoiding withdrawals lowers

your income tax bill. (See my Oct. 12 column online at TerrySavage.com or suntimes.com).

And if you took a withdrawal earlier in December, you may return it

without penalty. (Withdrawals taken earlier this year had to be

returned by Nov. 30.)

Taxes on debt relief

Until the 2007 Mortgage Forgiveness Debt Relief Act, any amount

"forgiven" on a foreclosure was considered taxable income! You don't

have to worry about that any more. But that's not the case if you were

able to negotiate a settlement on your credit card debt outside of

bankruptcy. If your card lender agreed to accept a lower payoff, you're

likely to receive a 1099-C "cancellation of debt" notice, showing the

amount written off as taxable income to you. So be prepared.

That seems a sad way to end a holiday column on taxes -- but then I

think all tax columns are gloomy because they involve money you earned.

And now you must deal with giving the government its share of your hard

work. Oh well, on the bright side, you could consider it your holiday

present to Uncle Sam. And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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