Year-end moves to trim your tax bill

Medical and miscellaneous deductions. Medical expenses and miscellaneous itemized deductions have "floors." For medical expenses, only those in excess of 7.5% of your adjusted gross income count. Miscellaneous itemized expenses have to exceed 2% of your AGI to qualify.

An important point: Your health insurance premiums count so long as you're not paying them out of a flexible spending account.

If you're going to exceed the floor, accelerate your expenses. Prepay your orthodontist or your tax preparer. Mail your checks on or before Dec. 31, 2009. Alternatively, if you're not going to exceed your floors, defer the deductions to 2010. You may exceed your floors then.

Pension or IRA contributions. These are especially important if you are self-employed. Unless you expect tax rates to shoot up, you want to pay your tax "tomorrow" rather than today.

If you're contributing to a retirement plan such as a 401k or a 403b, you can put in $16,500 this year and the same amount in 2010. If you're 50 or older, you can put in an additional $5,500 as a catch-up contribution.

Cash gifts. If you might ever be subject to the estate tax, make your $13,000 tax-free gift before the end of the year.

Capital gains and losses. 2009 has been another wacky, volatile year for investors, but the market is likely to show gains for this year. If you have capital gains, remember that any net capital losses over the $3,000 allowed on your 2008 tax return should be carried forward to offset those 2009 gains. If you still have net losses, up to $3,000 may be used to offset ordinary income for 2010.

All net long-term gains are subject to a maximum 15% rate. If you're in the 15% or lower tax bracket, your tax hit falls to zero.

• Talk back: What money moves do you plan to make by Dec. 31?

If you're single with taxable income of $32,550 or less, you get the 0% rate. With a standard deduction of $5,700 and a $3,650 personal exemption, you can have as much as $41,900 in gross income and still qualify.

If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income. If you have shares of stock pregnant with 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.

Video: The impact of the first-time homebuyer tax credit

A headache you may face

I fully expect some relief on the alternative minimum tax. And if we don't get it, I encourage you to yell loudly at your representative and senators for not getting the job done.

More and more middle-income taxpayers are being hit with the AMT each year, which is basically a parallel tax system designed to ensure that everyone pays some tax. But it's forcing too many people to pay more tax than they should.

Each year, Congress extends the AMT exemption; for 2009, it increased the exemption to $70,950 in taxable income for married couples filing jointly and $46,700 for single taxpayers. I expect more single-year changes in 2010.

Buy stuff

Buy a car before the end of this year and you can deduct the sales tax on the first $49,500, even if you take the standard deduction. This is good only for 2009.

Buy a new principal residence and you can get a 10% credit up to $8,000 if neither you nor your spouse owned a principal residence in the prior 36 months. You have until April 30, 2010, to close and still qualify.

If you owned a principal residence for five of the last eight years, you still qualify for a credit of as much as $6,500 if you buy a new one. The house doesn't have to be new. But it has to be a new principal residence. If the house costs more than $800,000, or if you're not yet age 18, you don't qualify.

Buy energy efficient improvements to your home and qualify for a credit of 30% of the cost with a maximum of $1,500. Added insulation, energy efficient exterior windows, heating and air-conditioning systems all qualify.

Updated Nov. 23, 2009

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