Last Updated: March 9, 2009
It's crunch time. Yes, millions of Americans are — in many cases with the help of financial professionals — scouring their records, looking for any and all ways to trim their tax bill. And given that there were more than 500 changes in tax laws put in place in 2008, there may be plenty of ways to keep your money in your pocket instead of Uncle Sam's. To be sure, it's best to start planning your tax return far in advance, but if you are among those procrastinating, consider these last-minute tax-saving tips from FPA members and other experts.
• If you're self-employed, you can reduce your taxable income by contributing to your retirement plan, such as an SEP-IRA. FPA member, Jeanne Gibson Sullivan, CFP®, a senior wealth manager at Back Bay Financial Group, notes that you can choose the type of plan that is right for you, visit the IRS's Web site, which features a "Starting a Retirement Plan for Your Small Business" section.
• Determine whether you are eligible for the Recovery Rebate Credit (RRC), said Justin D. Streeter, CPA, MBA, CFP®, a financial consultant at Hantz Financial Services. According to the IRS, the recovery rebate credit is a one-time benefit for people who didn't receive the full economic stimulus payment last year and whose circumstances may have changed, making them eligible now for some or all of the unpaid portion. According to FPA member, Don James, CPA/PFS, CFP®, president at Kiplinger Financial Services, the RRC is calculated in the same way as the 2008 economic stimulus payment except that your 2008 income tax information (as opposed to your 2007 tax information) is used to determine the amount of the RRC. James said the RRC is worth up to $600 for individuals with an adjusted gross income (AGI) of up to $75,000 and $1,200 for couples filing joint returns with an AGI of up to $150,000. An additional credit is available of up to $300 per qualifying child. For taxpayers without children, the maximum payment is fully phased out at $87,000 (and at $174,000 for joint filers). Individuals with an AGI of more than $87,000 and joint filers with an AGI of more than $174,000 are not eligible for the tax rebate. Learn more about the recovery rebate credit and whether you are eligible for the recovery rebate credit. These sites will tell you the amount of your 2008 stimulus payment. You should enter that amount onto their Recovery Rebate Credit worksheet to determine if you are due anything more. Also, depending on what your tax status was in 2007, your stimulus payment was estimated. Therefore you should carefully complete the recovery rebate credit worksheet to see if you qualify for additional rebate dollars due to a change in tax status, Streeter said.
• If you are electing to receive your refund via direct deposit, make sure to double check the account and routing numbers. According to FPA member, Kristine McKinley, CFP®, CPA, and president of Beacon Financial Advisors. Many banks have recently merged or became acquired. And that means your account
or routing number may have changed. A mistake here could delay your refund for up to four weeks, McKinley said.
• "Double check all names, Social Security numbers, and addresses as well," said McKinley. "Many people didn't receive their rebate last year because of simple errors - like a misspelled name - so this is an important step, especially if you are preparing your own taxes, or if you are using a tax preparer you've never worked with before," she said.
• If you own your home but don't itemize deductions, don't forget that you can now deduct real estate taxes above the line. McKinley noted that real estate taxes paid get added to your standard deduction.
• If you owe taxes, there's still time – at least for those who qualify - to make a tax-deductible contribution to an IRA. Learn more about IRA rules and laws.
• "Don't forget to pick up carryovers from previous years," said McKinley. You may have capital losses from the previous year, or other deductions that were disallowed last year that you may benefit from this year.
• Don't forget to deduct state and local taxes paid in 2008 for 2007. According to McKinley, if you itemize these are deductible in addition to your withholding for the year.
• Document your deductions. McKinley said the IRS is getting stricter about substantiating deductions such as charitable donations. Make sure you have a document to backup your deductions in case you ever get audited.
• Check the IRS' Web site for tax-saving tips. The IRS maintains on its Web site a section that features all types of tax tips. In recent weeks, for instance, the IRS has posted the following articles: Seven Things You Should Know When Selling Your Home; Claiming a Deduction for Your Home Office; Top Ten facts about the Tuition and Fees Deduction; Five Tips to Avoid Tax Time Stress; and Get Credit for Retirement Savings Contributions; and Standard or Itemized Deductions, among others. Learn more at IRS.gov.
• Now's the time to look for opportunities to sell investments in taxable accounts that have decreased in value. According to FPA member, Nate Wenner, CFP®, CPA, a financial planner at Wipfli Hewins Investment Advisors, you can sell those investments to offset current or future gains and a small amount of ordinary income on next year's tax return.
• Consider deducting, if you are eligible, insurance costs, especially long-term care insurance costs. Wenner said many people don't realize these costs can be deductible. Learn more at IRS.gov.
• Don't forget the potential for amending prior year returns as well, especially if you've found deductions you've missed, said Wenner.
• If you're retired, stop your IRA withdrawals if you can afford to. Wenner said required minimum distributions are not required for 2009.
• Recharacterizing a Roth conversion. If you converted your traditional IRA to a Roth IRA earlier this year, incurred a significant amount of tax liability on the conversion, and then watched as the value of your Roth account plummeted amid the market turmoil, you may want to consider undoing the conversion, said James. You can void or significantly lower your tax bill by recharacterizing the conversion, then reconverting your IRA back to a Roth at a later date. Careful timing in using this strategy, however, is essential. "Recharacterization" is simply the term given to the transaction in which you undo your original conversion from a traditional IRA to the Roth. Even if you converted your entire account to a Roth, you do not need to recharacterize the entire amount that you converted from your traditional IRA to the Roth and you can choose to only recharacterize a portion of that amount. To roll the money back and then forward into a new Roth IRA, you must undo the original Roth conversion, wait at least 30 days and then reconvert the IRA back to the Roth. This move may save you significant tax dollars since your IRA account is worthless due to the decline in market values. The recharacterization of a Roth conversion must meet certain requirements. The conversion must be completed by your tax filing deadline (typically April 15). If you converted an IRA in 2008, you have until October 15, 2009 to recharacterize the Roth conversion.
• Non-Deductible IRA Contributions. Starting in 2010, James said there is no income limit on Roth conversions. But that has implications today. If your income prevents you from contributing to a Roth IRA, you still can make annual contributions of $5,000 per person ($6,000 if 50 or over) to a non-deductible IRA, then convert these assets to Roths in 2010, with virtually no taxes owed (except on the gains occurring between the date of the contribution and the date of conversion). Furthermore, the resulting income, even though it results from a 2010 conversion, can be allocated between 2011 and 2012, making the tax effect even less significant. This means that, in effect, full annual Roth contributions can be made by everyone, including singles with income over $95,000 and married couples with income over $150,000. Just contribute to a non-deductible IRA and convert the account to a Roth in 2010. Presumably, in 2010, a person could contribute to the non-deductible IRA and convert it to a Roth the next day with no taxes owed at all. Warning: This strategy only applies to someone who has no IRA at the present time. The government treats the conversion of any IRA to a Roth as a proportional conversion of all of the IRAs of that individual. Therefore, if a person has previously untaxed amounts in other IRAs, they will end up owing a lot more in taxes on this conversion than they expect. The IRS does not allow the taxpayer to designate their conversions coming from the non-deductible contributions.
• Consider using any Health Savings Accounts (HSA) available to you, said Darren Zagarola, CFP®, CPA of EKS Associates. HSAs allow you to contribute pre-tax dollars to an account that your employer can later use to reimburse you for eligible medical, dental, vision and other health care related expenses. Since contributions are made before taxes, you save Social Security taxes, federal income tax, and, in most cases, state and local income taxes on the money you contribute to the account. Some employers do not require you to be on their health plan to take advantage of the benefit. Thus, if both spouses are working and the family is covered by the wife's health plan, you can still use the HSA offered by the husband's employer. Another benefit offered by some employers with similar benefits to the HSA is Dependent Care Reimbursement Account, which can be used towards child or elder care.