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A Tax Tip from The Tax Institute at H&R Block

With the year’s end fast approaching, tax analysts at H&R Block remind taxpayers there’s still time to minimize your tax bill for 2009 and build a strong financial base for 2010.

The following tips are designed to help guide you through the sometimes-confusing ins and outs of year-end tax planning, but are well-worth your time and energy.

1. Estimate your income and deductions: Comparing this year’s likely income against projected 2010 earnings is the key to making wise decisions at tax time. If it looks like you’ll make more in 2009 than in 2010, you may find that you’re ineligible for important credits and deductions this year. Hence, the wisest course may be to defer as much income as possible into 2010 or postpone incurring certain expenses until next year.

   Conversely, if you expect to make more in 2010 than in 2009, you may want to bunch deductions next year in order to minimize the taxes you’ll owe in 2010.

2. Maximize contributions to company-sponsored plans: This is a great place for a tax break. If you have not contributed the maximum to your 401(k), find out if you can increase your contributions for the year. Your contributions are made pre-tax, which reduces your adjusted gross income and overall tax bill. Employer matching can mean even more money in your retirement plan.
3. Take required minimum distributions (RMDs): If you turned 70 ½ in 2009, you must take your RMD from your traditional IRA no later than April 1, 2010, even if you are not yet retired. However, you may want to take your first RMD in 2009 because your second RMD must be taken by December 31, 2010. If you don’t take your RMD, you may owe a 50 percent penalty on the amount you should have taken.
4. Pay tuition for spring semester now: If you, your spouse or your dependents have a college tuition bill for the spring 2010 semester, you might benefit from paying the spring semester tuition before the end of 2009. The education credits are subject to income limits. For 2009, the phaseout begins when modified adjusted gross income reaches $48,000 – or $96,000 for married taxpayers filing a joint return. No Hope or Lifetime Learning credit may be taken once your modified adjusted gross income reaches $58,000 – or $116,000 for married taxpayers filing a joint return. If you expect a raise in 2010 that will bring your income into or over the phaseout range, pay the tuition now to be sure you can take advantage of the Hope credit or Lifetime Learning credit. Note: To take advantage of this special provision, the 2010 semester must begin no later than March 31, 2010.
5. Look out for AMT: Completing a year-end tax projection can help you determine if you’ll be subject to the AMT. Some itemized deductions are not allowed under the AMT which can result in a higher tax bill. Tactics to minimize the impact of AMT include: deferring capital gains (when appropriate), considering the timing risks associated with exercising incentive stock options and minimizing unreimbursed business expenses.
6. Consider your IRA: If you’re eligible to deduct your IRA contributions, you can make traditional IRA contributions to decrease your 2009 income. And, you can contribute right up until April 15, 2010, to impact your 2009 return.
7. Look at your withholding: Now is the time to ensure that you have enough tax withheld or have paid enough estimated tax to meet your projected obligations and – in the case of the estimated tax — to avoid a penalty for underpayment.
8. Plan your “green” deductions: Buying a hybrid car or truck in 2009 or 2010 may allow you a tax credit ranging from $650 to $4,000. The credit is variable, based on the make and model of the vehicle and how many have been produced by the manufacturer.
9. Hold your teenager’s investments for a few more years: If you’re thinking of giving investments to your child so that the income will be taxed at a lower rate, be aware that beginning in 2008 the “kiddie tax” rules continue to apply until your child reaches age 18 and, depending on your child’s school and support status, may continue to apply until your child turns 24. If the kiddie tax rules apply, your child’s unearned income, such as interest and dividends in excess of $1,800, is taxed at your marginal tax rate.
10. Examine your portfolio: If you have a large net capital gain in 2009, you might want to consider reducing your tax liability by selling some stock that will generate a loss before year-end. Offsetting a short-term capital gain can be particularly advantageous, since such gains can be taxed as high as 35 percent in 2010.

This Tax Tip is brought to you by The Tax Institute at H&R Block. The Tax Institute is a national leader in providing unbiased research, analysis and interpretation of federal and state tax laws. Staffed by Enrolled Agents, CPAs and Attorneys, The Tax Institute provides industry expertise for matters related to taxes and the professional tax preparation industry.

This Tax Tip is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties. As always, everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

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