One more word to the wise: It’s usually a bad idea to make a new mutual fund purchase in November or December until after the fund has made its capital gains distributions for the year. If you buy in the day before the distribution, you have to declare it and pay taxes on it, even if you haven’t been in the fund long enough to enjoy the gains.
Consider converting your traditional IRA to a Roth. You contribute to a Roth IRA with money that has been taxed, and no tax is levied on the funds withdrawn, as long as they’re used for retirement. But Roths have been off limits to individuals and couples earning more than $100,000, and people who could contribute had to pay taxes right away on funds they were converting from a traditional IRA.
In 2010, both of those rules ease. Anyone can convert an IRA to a Roth, and the resulting tax burden can be spread over two years—2010 and 2011. Savers who think they want to make this move in 2010 can make one more contribution to their tax-deferred IRA in 2009, so that there’s more to transfer next year.
3. Make your spending tax-savvy
If you intend to buy a car, motorcycle, light truck or motor home, act before the year ends. Last winter’s stimulus bill included a tax deduction for the state and local sales and excise taxes you’d pay on a new vehicle costing up to $49,500. You’ll get a deduction even if you don’t itemize, as long as you earn less than $135,000 ($260,000 for couples filing jointly).
Also, a few hybrid vehicles made by Ford and Mercury still qualify for tax credits through March, says Robin Christian, a senior tax analyst with Thompson Reuters.
Of course, you may find it’s more economical to keep driving your old car, or to buy a used car that’s not eligible for the deduction.
Give your babysitter a bonus and see the dentist. “Employees can give themselves an extra raise” by making sure they use up every last dollar sitting in their company health care and dependent care spending accounts, advises William E. Massey, a senior tax analyst at Thomson Reuters. Typically, they have until Dec. 31 to spend the tax-deferred funds or forfeit them, though some employers offer a grace period until March 15 of the following year. Qualified health expenses usually include discretionary items like eyeglasses, dental visits and even over-the-counter medications. Dependent care funds can be used for children or an aging parent who is legally your dependent.
Get a tax credit for buying energy-efficient items like replacement windows, insulation and water heaters. The credit is for 30 percent of the purchase price, up to $1,500, and it’s available through 2010. To make sure your purchase qualifies, check the Department of Energy’s list.
Charitable gifts are tax-deductible, but that’s not much help to those of you who don’t itemize your deductions. In 2009, if you are 70 1/2 or older, you can distribute up to $100,000 directly from your tax-deferred IRA to a charity without paying tax on the distribution. That gift cannot additionally be claimed as a charitable tax deduction, however.
Make extra payments in 2009 for deductible expenses you ordinarily would pay early next year. Good candidates are your estimated state income tax payment, an extra mortgage payment, and your property tax bill.
Some expenses are deductible only if they exceed 2 percent of your adjusted gross income. Many tax advisers recommend “bunching” these deductions into every other year, to maximize their benefit. The IRS website has a list of allowed deductions—investment fees and expenses, safe deposit box rental fees, job-related expenses and more. That includes tax planning fees, too, so if you ask your accountant for a quick review of your taxes now, you can write those charges off, too.
Linda Stern is a freelance journalist who writes about taxes and other financial issues. She lives in Maryland.