Get ahead of the tax man
BY TERRY SAVAGE Sun-Times Columnist Dec 14, 2009
Having a baby before 2010 arrives could save you thousands in taxes.
Updated: May 3, 2013 12:15PM
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.
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.