Taxes will never disappear, but you can ease the sting
Even in hard times, taxes are, borrowing from Ben Franklin, as certain as death. But there are tax provisions that can ease the sting of an economic downturn.
NOW YOU QUALIFY
It's bittersweet, but Bob Scharin, a senior analyst at the tax and accounting arm of Thomson Reuters, says less income from investments or a job could have a positive side. "Falling income can put taxpayers in reach of deductions and credits they otherwise would not be eligible for," he notes.
Among the tax benefits linked to your level of income are breaks covering dependent children, college tuition, education savings accounts, IRAs, student loan interest, adoption expenses, and medical care. Also tied to income: a cap on overall itemized deductions.
The phase-outs and caps vary, so if your 2008 income fell, it may pay to revisit items you previously couldn't claim, Scharin says.
HOME SWEET HOME?
Legislation in response to dropping house values has enhanced the favored tax treatment of homes. But complexities may demand help from an accountant or skilled tax preparer.
Debt forgiven on a mortgage through renegotiation, foreclosure, or sale may no longer result in taxable income to the homeowner in the amount of the excused debt. The provision doesn't cover second homes and most home equity loans.
Home buyers who haven't owned a home as their principal residence in the past three years may qualify for a tax rebate of $7,500 to help fuel their purchase, but the amount has to be repaid over 15 years and applies only to homes bought from April 9, 2008, through June 30, 2009.
People who don't claim itemized deductions can now deduct $500 of property tax ($1,000 on a joint return) in addition to their standard deduction, currently effective on returns filed for 2008 and 2009.
You still can't deduct a loss when selling your home, notes Fred Witt, national director of real estate tax services for Deloitte Tax, but as much as $500,000 profit from a sale can escape taxation.
People who can deduct their car as a business expense may want to consider buying a new one.
Under this year's Economic Stimulus Act, cars bought in 2008 are eligible for bonus accelerated depreciation, which can boost the first-year deduction by $8,000, to a total of $10,960.
In a controversial quirk, buyers of large SUVs may be able to piggyback write-offs to claim a much larger business deduction, possibly $40,000 on a $50,000 vehicle.
POSITIVE ON LOSSES
It's an imperfect silver lining, but stock market losses from unloading dogs can offset any taxable gains you rang up earlier in the year and shelter up to $3,000 a year of wages from tax.
Hang on for a rebound? You can grab a tax loss and thereby reduce taxable income by selling downtrodden shares and then buy the same stock again. You must, however, wait more than 30 days to buy the stock again or the loss is disallowed as a "wash sale."
To sidestep the 30-day wait you can replace the shares sold with those of a similar company in the same industry, says CPA Buz Aaron at Braver PC in Newton.
Investors in mutual funds can often avoid a wash sale by swapping to a comparable fund in the same fund family, advises CPA Art Ford of Sullivan Bille in Tewksbury.
RETIREMENT CASH NOW
That balance in an IRA, 401(k), or other retirement plan can be tempting when budgets are squeezed.
Pulling out funds, however, could mean additional income tax and a penalty and disrupt disciplined savings. "I advise it only as an absolute last resort," says Leon Rudman, a Stoughton enrolled agent, a category of federally authorized tax practitioners.
One option for a 401(k) is to borrow from the account, says Cliff Caplan, a financial planner at Neponset Valley Financial Partners in Norwood: "You have to repay the money, but you are basically repaying it to yourself," he says.
You can't borrow from an IRA, but one dicey tactic is to temporarily withdraw funds from the account. Just be sure to roll the amount back to an IRA within 60 days to avoid tax and penalty.
TAKING CARE OF HEIRS
A cool economy makes estate planning hot.
Depressed asset values, low interest rates, and tax bites that may get worse create a good setting in which to transfer assets to heirs while minimizing gift and estate taxes, says attorney Herbert Daroff at Baystate Financial Services in Boston.
Transfers can result in low current valuations for tax purposes yet provide for future asset growth, he explains.
BOOSTING A PAYCHECK
When filing returns, a large majority of people get money from the Internal Revenue Service, typically because too much tax is withheld from pay. A cushion can avoid a nasty surprise at tax time, but enrolled agent Nancy Goedecke in Hudson says, "Some people use the IRS as a savings bank."
"If you normally get a big refund you may want to get some of that each week by adjusting your withholding," says IRS spokesperson Peggy Riley.
An online calculator (in the individuals section at www.irs.gov) and a worksheet with the W-4 form you give your employer can help with the calculations, especially if your family, job, or financial situation has changed. Adjusting your withholding will increase your take-home pay throughout the year and give you more money to spend, save, or invest.