Every year, Congress tinkers with the tax code. This year more than most. Every year, your life changes. That makes tax planning an all-year activity.
There are a few tax-saving moves you can make until April 15 that will affect your 2009 taxes. The rest of your moves must be made by Dec. 31, 2009, to benefit you for 2009.
This brings us to my most profound advice for 2009: An aggressive tax-planning strategy may be to accelerate income into the shelter of lower rates this year, especially if you can take refuge under the special zero rates on dividends and long-term capital gains if you’re in the 15% bracket or lower. Here's what to think about:
Use those larger retirement deferralsA wise man once told me that if I lived below my means, someday I'd be wealthy. It was good advice.
Put more money aside for retirement. In 2009, extensive changes were made to the rules relating to individual retirement accounts and qualified pension plans.
You still have until April 15, 2010, to make IRA contributions that may qualify for a tax break on your 2009 taxes. For SEP-IRAs (Simplified Employee Pension plans) and Keogh accounts (either profit-sharing or money-purchase plans), you can contribute until Oct. 15 if you filed the appropriate extension application. But if you haven't establish a Keogh by Dec. 31, you won't be able to deduct any contributions until you file your 2010 return in 2011. Check with a tax pro to be sure.
|Changes in retirement-plan contribution limits|
Defined contribution plans
Simple IRA plans
Special additional contributions are now available if you're 50 or older. Here's a rundown:
- IRA accounts. You can contribute an additional $1,000 (for a total of $6,000 for 2009) into an IRA.
- Section 401k, 403b annuities and Section 457 plans. These now allow for additional $5,500 in contributions in 2009.
- SIMPLE plans. If you contribute to a SIMPLE plan (Savings Incentive Match Plan for Employees of Small Employers), you get an additional $2,500 for 2009 once you hit the half-century mark.
You can now borrow from your qualified plans if you're self-employed or an employee shareholder of an S corporation, an entity that functions much like a partnership. For now, only loans from IRAs are prohibited.
But consider this: Distributions from such plans will always be taxed at your highest marginal ordinary rate. Depending on your assumptions, rate of growth and age, it may be better to invest for growth outside your retirement plans.Students and their parents make out well in in 2009.
If you're single and made less than $65,000 ($130,000 on a joint return), you can get an above-the-line college-tuition deduction for 2009 of as much as $4,000 for yourself or a dependent child. This tax break will probably be extended in 2010, but that has not yet happened. (If you feel up to it, lobby your senators and congressman -- hard.)
If you meet the 2009 income qualifications, you can take the American Opportunity or Lifetime Learning tax credits, which may be even more valuable tax breaks. (A warning: You can't claim the tuition deduction along with either of these tax credits.) While the Hope credit still exists for 2009 and 2010, it will always be better to take the American Opportunity tax credit.
The latter credit phases out as your income surpasses $80,000 ($160,000 if you file jointly). If you file as single, the Lifetime Learning credit starts phasing out as your adjusted gross income exceeds $50,000 and disappears as you exceed $60,000. If you're married and file jointly, the credit is phased out for incomes from $100,000 to $120,000. The 2009 Hope credit is capped at $1,800. You can erase as much as $2,000 in tax with the Lifetime Learning Credit and as much as $2,500 with the American Opportunity credit.
- Get more information on the Hope and Lifetime Learning credits here and here and more on the American Opportunity credit here.
If you've graduated from college, your employer can give you as much as $5,200 a year in tax-free graduate-school assistance.
The old IRA for education, now known as the Coverdell Education Account, allows tax-free withdrawals for tutoring, computer equipment, room and board, uniforms, tuition and extended-day programs for kindergarten through grade 12. The annual contribution limit is $2,000 per child.
Distributions from Section 529 accounts for college expenses are tax-free. In the past, they were taxed at the child's rate.
The Section 529 contribution limits are big; many state plans allow as much as $300,000 per beneficiary. Because the annual gift-tax exclusion is $13,000, you can now contribute as much as $65,000 per child in a single year. Two parents can contribute as much as $130,000.
Teachers keep a nice breakOur Congress just loves learning; 2009 has plenty of benefits for kids and education.
If you're a teacher, you get a special benefit: You can deduct as much as $250 of your classroom expenses without having to itemize on your 2009 taxes. This applies if you are a teacher, instructor, counselor, principal or aide and worked in kindergarten through grade 12.
This nice little tax break was supposed to die in 2004, 2006 and again in 2007, but Congress reinstated the provision to apply to both 2008 and 2009. I hope Congress makes this break permanent.