The holidays are here, and they definitely will divert your attention.
This is my last -- AND LOUD -- reminder to take a few minutes from your holiday merrymaking to get those last-minute tax moves done.
You have until Dec. 31. After that, there's little you can do to cut your tax bill. Here are moves to make now:
Capital gains and lossesNormally, I'd start with the simplest things, but I'll start with probably the most painful subject to deal with: your investments.
For many investors, 2008 has been, well, dreadful. The Dow Jones Industrial Average and the Standard & Poor's 500 Index are down as much 40% on the year. And that's actually an improvement over November's lows.
But let's turn those losses to good use.
You can write off those losses against, first, any capital gains. So, if you have a stock or a mutual fund that you've owned for a year and is showing a decent gain in that time (such as Wal-Mart Stores or McDonald's, the only Dow stocks with gains this year), look for another stock or a mutual fund that's a loser.
If you sell the winner, you can offset your gain, dollar for dollar, by selling the loser.
And make sure you've put the sell orders in by Dec. 31. (Make your broker give you written confirmation.)
If you don't have any winners, not to worry. You can sell your losers and offset as much as $3,000 in ordinary income for 2008. Anything exceeding $3,000 can be applied, first, to offset 2009 capital gains and then to offset ordinary income in 2009.
But remember: To get the tax treatment, sell by Dec. 31.
Generally speaking, all net long-term gains are subject to a maximum 15% rate. But if you're in the 10% or 15% tax bracket for 2008 through 2010, you get a break. Your gain will be subject to zero tax. (Zero is one of my favorite words.)
If you're single with taxable income of $32,500 or less, you get the zero rate. With a standard deduction of $5,450 ($5,700 for 2009) and a $3,500 ($3,650 for 2009) personal exemption, you can have as much as $41,500 in gross income and still qualify. (Likewise, joint filers can qualify with as much as $83,000 in adjusted gross income.)
If you have shares of stock pregnant with miraculous gains and you don't expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case: Pay the maximum 15% tax. You can't go broke taking profits.
One bit of bad news: If your losses are inside a retirement account, you can't deduct them. On this, I am sorry.
Charitable donationsIf you contribute to your church, your college, the local dog pound, United Way or organizations contributing to disaster relief, make these donations by Dec. 31.
And, before filing your tax return, make sure you have receipts from the organizations that benefited from your generosity.
If you don't have the cash, find out whether the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it's valid as a 2008 deduction.
- Talk back: What money moves will you make by Dec. 31?
Separately, any contributions of clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, you will need an appraisal. The Internal Revenue Service can deny deductions for items of minimal value.
Complicating any deductions are the requirements that the IRS instituted in 2007 on record keeping. This is important.
To deduct a cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing its name and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.
Your flexible spending accountThis isn't exactly a tax savings, but if you don't use the dollars you contribute to a flex plan, you lose them.
The IRS allows purchases made through March 15, 2009, to count. Your employer can give you a debit card for your flexible spending account. You can even pay for nonprescription drugs through an FSA. That eliminates a whole lot of paperwork.
Be careful, however. The IRS may allow the extended March 15 date, but, unless your employer's plan is amended to allow it, you won't qualify.
Mortgage interestMake your January mortgage payment by Dec. 31. Send in a check or pay it online.
Remember to add the interest you paid to what your bank reports on its Form 1098. Your bank will get your payment in 2009 and won't report it for 2008.
But because you paid it this year, it adds to your 2008 deduction. (The downside, of course, is that you won't be able to deduct the payment from your 2009 return.)