Tip 1: Be careful when buying a new mutual fund.
Most mutual funds pay out capital gains and dividends toward the end of the year, so check for potential distributions before you purchase a new fund. And think twice before purchasing a fund that will be distributing a large amount of gains and dividends.
The IRS doesn't care how long you’ve held a mutual fund when it comes to taxes on distributions. Investors that purchase a fund just before the payout will be taxed the same as the investors that have held the fund throughout the year.
Tip 2: Prepay your property taxes.
Property tax payments aren’t due until the end of January, but if you pay them before the end of the year you can claim the deduction in 2009. But if you expect to be in a higher tax bracket next year, you can wait until January to pay then prepay next December so you can deduct two years of property taxes in 2010.
Tip 3: Pay your January mortgage payment before December 31st.
By paying your January mortgage payment before the end of the year, you’ll be able to increase your mortgage interest deduction this year by the extra amount of interest you pay in the January payment.
Tip 4: Review your portfolio.
Investment gains can be reduced by investment losses, and excess losses can be written off against income up to $3,000 and rolled over to future years. But before you start selling investments, remember that the long-term capital gains tax rate for individuals in the 10 and 15% tax brackets is 0%, and this is scheduled to continue through 2010.
Tip 5: Defer income.
If you’re self-employed and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income until January. This is especially beneficial if you expect to be in a lower tax bracket next year.
Tip 6: Contribute to your 401(k) or 403(b)
Contributions to 401(k)s and 403(b)s will reduce your taxable income for the year. In addition to saving money on taxes, you'll also receive "free money" from your company if they match your contribution.
Keep in mind that some 401(k) plans now offer employees the option of making "Roth type" contributions that don't reduce your current taxes but will be tax-free when withdrawn if you meet the requirements.
Tip 7: Contribute to a Traditional IRA
Contributions to a Traditional IRA will reduce your taxable income for the year just like contributions to 401(k) and 403(b) plans. Just make sure you are eligible to deduct the amount you contribute. (Click
here to check the deduction limits for 2009.)
Tip 8: Don't contribute to your 401(k), 403(b), or Traditional IRA
Yes, this tip contradicts tips 7 and 8. The point of this tip is that you need to balance current tax savings with future tax savings. It might be better for you to avoid taking a tax deduction now in favor of contributing to a Roth IRA, or making "Roth type" contributions to your 401(k), in order to have a source of tax-free income in retirement.
Deciding whether to take the tax deduction now or later involves some calculations, knowledge of current tax law, forecasts about future tax law, and a little bit of "gut feeling"; so consult your tax advisor or a "fee-only" financial advisor if you want professional guidance.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.
This and all other posts on this blog are for informational purposes only. This is not to be considered tax advice and is not intended to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
