To cut next year's taxes, start now

By Jeff Schnepper

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 2008 taxes. The rest of your moves must be made by Dec. 31, 2008 to benefit you for 2008.

This brings us to my most profound advice for 2008: 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 deferrals

A 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 2008, extensive changes were made to the rules relating to individual retirement accounts and qualified pension plans.

You still have until April 15, 2009, to make IRA contributions that may qualify for a tax break on your 2008 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 didn't establish a Keogh by Dec. 31, you won't be able to deduct any contributions until you file your 2009 return next year. Check with a tax pro to be sure.

Changes in retirement-plan contribution limits
Plan type	2008	2009
Defined contribution plans	$46,000	$49,000
Simple IRA plans	$10,500	$11,500
401(k) contributions	$15,500	$20,500
IRA contributions	$4,000	$5,000

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 $5,000 for 2007 and $6,000 for 2008) into an IRA.
• Section 401(k), 403(b) annuities and Section 457 plans. These now allow for additional $5,000 in contributions in 2007 and 2008.
• 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 2007 and $2,500 in 2008 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. 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 2008 and 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 2008 and 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 2008 income qualifications, you can take the Hope 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.) If you file as single or head of household, the credits start phasing out if your adjusted gross income is above $48,000 and disappear if you make more than $58,000. If you're married and file jointly, the credit is phased out for incomes from $96,000 to $116,000. The 2008 Hope credit is capped at $1,800. You can erase as much as $2,000 in tax with the Lifetime Learning Credit

• Get more information on the Hope and Lifetime Learning credits here and 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 $12,000, you can now contribute as much as $60,000 per child in a single year. Two parents can contribute as much as $120,000. In 2009, the exclusion grows to $13,000. That increases the single year cap on the parental contribution to $130,000.

Teachers keep a nice break

Our Congress just loves learning; 2008 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 2008 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.

Continued: Enjoy the lower rates

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