Last-Minute Financial Moves to Cut Your Taxes


BOSTON (TheStreet) — As 2009 draws to a close, a few last-minute financial moves could cut your tax bill, shore-up your retirement savings and boost your investments.

"Most taxpayers don't start thinking about taxes until after the New Year," says Mark Steber, chief tax officer for Jackson Hewitt Tax Service (Stock Quote: JTX). "The truth is, simple steps taken in these final weeks of 2009 can put them in a better position when it comes time to file."

Among the well-publicized provisos made available in 2009 were the $8,000 credit for first-time homebuyers and the Making Work Pay credit. Other popular tax benefits were also expanded, including the Earned Income Tax Credit and deductions related to energy-saving home improvements.

Medical costs can be defrayed through taxes, but to qualify, expenses must add up to 7.5% of your adjusted gross income. "If you are borderline to meeting the necessary threshold, consider expediting some medical expenses for the following year," Steber says.

Bridge the gap by moving any doctor and dentist appointments scheduled for early next year to December. If you're 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 premiums for the following year up front.

"If you are not vulnerable to the Alternative Minimum Tax (AMT), consider paying your fourth-quarter 2009 estimated state income taxes, plus any estimated balance due, by Dec. 31 so you can take the deduction on your 2009 taxes," says Rande Spiegelman, vice president of financial planning at Charles Schwab's (Stock Quote: SCHW) Center for Financial Research. "You can also prepay property taxes. Many counties bill taxpayers twice, in November and February. If you pay your February installment by Dec. 31, you can take it as a deduction on your 2009 return. Again, watch out for the AMT, which disallows these deductions."

The end of the year can also be an ideal time to reconsider your retirement strategy and rebalance your portfolio. End-of-year decisions, such as whether to adjust your payroll contribution or explore other savings options should also be made.

If you think you may bump up to a higher tax bracket in the future, consider establishing a Roth IRA. Although there is an upfront tax hit, future distributions are tax-free. As of Jan. 1, people who didn't qualified for Roth plans because they earned $100,000 or more can pursue the option of a conversion for the first time.

If you're self-employed, consider opening a small-business retirement account such as a SEP-IRA, SIMPLE IRA ("Savings Incentive Match Plan for Employees") or individual 401(k). If you open a qualified retirement account by Dec. 31, you have until the day you file next year, including extensions, to make contributions for this year.

If you're 70½ or older and required to take minimum distributions from your retirement accounts, you would traditionally need to do so before the end of the year. But remember that minimum distributions have been suspended for 2009 and will be reinstated in 2010.

Debt consolidation is also a smart move to consider as the year draws to a close. You may benefit by replacing credit card debt with a lower-rate, tax-deductible home equity loan or line of credit.

If you lowered your mortgage interest rate in the past year, you may now have a lower-interest deduction, Spiegelman says.

"If you used any of the proceeds for something other than physical improvements to your home, that amount may be subject to the AMT," he says. "On the brighter side, remember that points paid in prior refinancings that you didn't already deduct can be deducted in the year you refinanced again."

If you suffered losses in 2009, there may also be a silver lining. You can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income ($1,500 for married couples filing separately). Look in your taxable accounts for investments with relatively large losses where you don't expect a comeback. Any losses you can't use to offset gains this year can be carried over into future tax years.

Be sure to stay clear of the so-called "wash sale rule," which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days. If your investments rebounded, taking your profits in 2009 may make sense. The maximum capital gains rate, now at 28%, is likely to increase by 2010 or 2011.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at

Show Comments

Back to Top