The best tax tip for 2008: Don't give the IRS anything at all to quibble over
The most important tax tip to remember this year:
Make sure your return is accurate, as the Internal Revenue Service is looking for every dime it can get, says tax attorney Ian Comisky.
"Because of a huge deficit and major enforcement initiatives by the IRS, an inaccurate return will have a better chance of being picked up than in prior years," said Comisky, a partner at the Philadelphia office of Blank Rome LLP.
The US budget deficit grew to a record $455 billion this fiscal year, and the Congressional Budget Office estimates it will reach $408 billion for the first two months of fiscal 2009.
IRS Commissioner Doug Shulman said in a Dec. 8 speech to tax lawyers that the agency will "remain vigilant to ensure that wealthy individuals don't use offshore accounts to avoid paying their US taxes."
People with incomes above $500,000 a year are more likely to cheat on their taxes than those with lower incomes, according to a paper published by University of Michigan business professor Joel Slemrod and IRS economist Andrew Johns.
Uncertainty regarding the economy and possible tax measures by President-elect Barack Obama, including a campaign pledge to raise the long-term capital gains tax to 20 percent from 15 percent for households that earn more than $250,000, has many taxpayers wondering whether to accelerate or defer income and deductions.
There are steps taxpayers can take to make sure they make the most of a dismal year, planners say.
"Always think about tax planning over a two-year horizon, at a minimum," said Jackie Perlman, senior tax research analyst at H&R Block Tax Institute. Filers should estimate what their income will be and any big purchases they will make over the next couple of years, she said.
A 39 percent drop in the Standard & Poor's 500 index this year may present an opportunity for investors to restructure their portfolios. Stocks that have performed poorly can be "harvested" to offset capital gains. If losses exceed capital gains, up to $3,000 can be deducted from taxable ordinary income for married couples who file jointly. Additional losses can be carried over to offset gains in future years.
Alan Skrainka, chief market strategist at Edward Jones & Co., said investors need to buy similar investments after selling to avoid "moving out and missing a market rebound." Buyers also should be aware of the so-called wash-sale rule, which prevents repurchase of the same security or fund before or after 30 days from the selling date.
Beware of buying a mutual fund before it makes its yearly capital gains distribution, which is usually in mid-December, said Helen Modly, of Focus Wealth Management Ltd.
Record mutual-fund withdrawals have forced managers to sell their profitable stocks to meet redemption requests, triggering distributions and possible capital gains, even if the fund has lost value. "If you buy in right before distributions, some of the money you bought into the fund with will be returned to you as taxable income," Modly said.
She also advised reporting income as diligently as possible, saying "this is not the year to go into the gray area on your return."