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End-of-the-year tax management

Marketplace Staff Nov 20, 2009

End-of-the-year tax management

Marketplace Staff Nov 20, 2009


Tess Vigeland: It’s almost New Year’s! OK, it’s not even Thanksgiving yet, but you do only have six weeks or so to get your end-of-year finances in order.

First, your Flexible Spending Account money — we’ll get to that in a minute. And six weeks to figure out how to shrink your tax bill.

Let’s deal with the IRS. Washington handed out a flurry of new credits and deductions this year. So we’ve asked Tom Herman to join us again. He’s the former tax columnist for the Wall Street Journal, and he’s going to help us make the most out of what’s left of 2009. Welcome to the program.

Tom Herman: Thanks very much Tess. Good to be with you.

Vigeland: This has been one crazy year, at least when it comes to investing. The market hit bottom back in March, its rebounded since then. What are some of the big things investors need to watch out for in a volatile time like this, when it comes to their taxes?

Herman: Start by taking a fresh look at your investments. Focus on your losers, that are now selling for less than you paid for them. If you were thinking of dumping them between now and the year end, this is a good time to do it. I know that it’s painful to admit you’ve lost money on a stock.

Vigeland: Yup.

Herman: But you can cut your taxes significantly if you do it right. For example, if you sold a stock earlier this year for $10,000 profit, and this month you sell another stock for $10,000 loss. The result is that your loss eliminates your gain and that means no capital gains tax on the gain. I think most investors are probably aware of that, but they may not be aware of the other part of this rule — and this is the part to focus on. Suppose you have no gains or your losses are bigger than your gains, now you sell a stock for $10,000 loss, you typically can deduct as much as $3,000 of that net loss against your wages and other ordinary income.

Vigeland: Now let’s talk about one tax credit that was supposed to be just for this year that’s actually been extended into next year. This is the first-time home buyers tax credit. Remind us who qualifies and what they have to do to make sure it counts on their taxes.

Herman: The credit works out to 10 percent of the purchase price of your principal residence with an $8,000 ceiling. As a tax credit, it’s better than a deduction. A deduction reduces your taxable income and that’s nice, but a credit actually reduces your credit on a dollar-for-dollar basis. There are a lot of restrictions on who’s eligible.

Vigeland: This has made me laugh, because they call it a “first-time home buyer credit,” but it’s not really for first time. It’s if you haven’t owned in the last three years.

Herman: Exactly. I know, this is typical of tax. They say “first time home buyer credit,” so a lot of people figure they’re not eligible. But a lot of people who think they’re not eligible, may actually be eligible. But there are other restrictions too. For instance, income. The credit becomes to disappear, or as the tax geeks like to call it “faze out,” when your income exceeds $75,000 or a $150,000, if you’re filing jointly with your spouse.

Vigeland: OK. Now I know there are lots of ways that living green can pay off at tax time. Can you briefly run through the various home projects that could knock down your tax bill?

Herman: Sure. This is a very important area. For example, suppose you install energy efficient installation or windows or doors or other things — you may be entitled to a tax credit of up to 30 percent of the purchase price, up to the maximum credit of $1,500. There’s a long list of items that qualify for this. The best way to do that is to check the Web site. It’s www.energystar.gov/taxcredits

Vigeland: And we’ll have a link to that on our Web site as well. Any other tips for folks to help keep that tax bill down come next April?

Herman: Remember that you can only deduct charitable donations if you do what’s called “itemizing.” Itemizing means actually listing all of your charitable gifts. If you take what’s called the “standard deduction,” as nearly two-thirds of all tax payers do, you can’t deduct your charitable gifts.

Vigeland: And as a procrastinator myself, I can urge everyone not to wait until Dec. 31 to take their donations to Goodwill and Salvation Army, because the parking lot will be full.

Herman: That’s a very good point. Absolutely, got those done as early as possible.

Vigeland: Tom Herman recently retired after writing the Wall Street Journal’s tax column for 16 years. He’s still writing for them and is joining us to talk about all the last minute tips for you as you get ready for the end of the year and tax season. Tom thanks so much. Always nice to have you on the show.

Herman: My pleasure. Thanks, Tess.

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