Depsite a difficult year for most people, there is one person that is certain to get paid this year, and that is Uncle Sam. Here are some end of the year tax tips to consider for 2009 in order to keep more money in your pocket.
Convert to a Roth IRA. Because many IRA values have decreased significantly in the past year, you might consider converting your traditional IRA to a Roth IRA. While taxes are due at conversion, you’ll pay the tax while the stock market is lower. As the stock market hopefully recovers in future years, your total tax burden will be lighter. The advantage to a Roth IRA is that since the contributions are not made with pre-tax money, distributions during retirement are tax free.
Even better, for 2010, there are no income limits for Roth conversions. This means that regardless of income, any one can qualify for conversion.
Take Losses. Though the market has improved significinatlly from where we were last year, many people still have plenty of losses in their stock portfolios they can use to offset gains. According to the IRS, “If your capital losses exceed your capital gains, the excess can be deducted on your tax return up to a limit of $3,000 ($1,500 if filing married filing separately.)
Take Gains. For those fortunate enough to have experienced the swingback of the market and the benefit of capital gains, it may be adventageous to take your profits now. Currently, the maximum capital gains rate is 28%. Though it is impossible to predict the future, it is likely the current administration will increase the capital gains tax rates at the end of 2010. Consider taking advantage of low capital gains rates now.
Dig Deeper For Deductions. Most people are aware of the “biggies” in deductions such as interest on your mortgage and student loans, and charitable contributions. But if you are self-employed, other deductible items may offer relief. These include unreimbursed mileage, cell phone and Internet expenses, home office use, advertising, legal and accounting fees, professional seminars, publications or books, parking fees, and professional dues and licenses.
Contribute to Retirement Account. As an incentive to encourage Americans to save for retirement, the IRS offers deductions for retirement contributions, which can lower your taxable income. For 2009 you can contribute $5,000 (plus an additional $1,000 if you are age 50 or older) to your IRA. Depending upon your income, the contribution may or may not be deductible.
Medical Expenses. To take a deduction for qualified medical expenses, the expenses must add up to 7.5% of your Adjusted Gross Income. If you are borderline to meeting the necessary threshold, consider expediating some medical expenses for the following year. For example, if you are self employed, health insurance premiums are considered paid in the year they are charged to your credit card. If your cash flow allows, consider paying your premiums for the following year up front. Or consider squeezing in any of the doctor and dentist appointments usually scheduled for the first of the year into December.
This is a brand new weekly featured post on Own The Dollar from Sara Peak, a Certified Financial Planner and a veteran of the finance industry. In addition to her monthly “Money Matters” column in Kentucky Living magazine, she also writes about money and personal finance topics on her blog.
Be sure to look for more great featured articles every week from Sara. If you have a question or topic that you would like for her to discuss, please contact us.
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Excellent tips. One thing to consider for 2010 Roth IRA contributions… Because the $100,000 limit is eliminated for Roth IRA conversions, it essentially eliminates the income limits for making a contribution. Why? Because anyone can make non-deductible IRA contributions regardless of income, and then your IRA can immediately be converted into a Roth IRA due to the lifting of the conversion limit amount!
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