To cut next year's taxes, start now

Enjoy the lower rates

Nobody has started to tinker with tax rates yet this year. Our tax rates are the lowest I can remember, and I've been around for a while. Compare our 2009 rates with those eight years ago.

Tax-rate changes between 2001 and 2009
2009 rates	2001 rates	% change from 2001 to 2009
10%	10%	0.00%
15%	15%	0.00%
25%	28%	-9.09%
28%	31%	-8.20%
33%	36%	-8.33%
35%	39%	-10.49%

In addition, amounts in each bracket are automatically increased for inflation. The combination of larger brackets and lower marginal rates, especially for upper-income taxpayers, has put more dollars in your pocket in the past few years and will continue to do so.

The practical effect of the change is this: If you and your spouse file jointly and had taxable income of $80,000 in 2001 and expect the same in 2009, your federal income tax bill drops from $16,350 to $12,375, a savings of $3,975.

If your taxable income is $150,000, the tax bill falls from $36,822.50 to $30,263.50, a savings of $6,559.

And that's starting with taxable income. When you add in all the new deductions and expanded credits, there should be a lot more money in our pockets after taxes than a few years ago.

Enjoy it while you can. Does anyone believe the rates won't move higher? Congress and the White House seem to be intent on proving that the "big bang" theory really works. The cash to pay for increased defense, bailouts and other spending has to come from somewhere.

President Barack Obama has promised a tax increase for the "wealthy." The problem is that the definition of wealthy has ranged from $250,000 down to $150,000. And that excludes the discussion of whether we’re talking adjusted gross income or taxable income.

Tax-planning moves to make

• Defer income if you can. Let's say we don't expect tax rates to rise in 2010. The betting is they'll at least stay constant for a while or perhaps even decrease if you don’t qualify as "wealthy" and believe the politicians. If you don't have to take the income in calendar 2009, defer it into 2010. That way, the income is off your 2009 tax return. Postpone the pain. Personally, I see rates going up -- sorry.
• Use the tax laws to minimize any stock-market pain. As 2009 showed us, the market can be very volatile -- and sometimes just plain ugly. So you may have some investments that have generated deductible losses while others (hopefully) have major gains. You can use your losses to offset any gains. On a net basis, all capital losses, regardless of whether they're short- or long-term, offset capital gains on a dollar-for-dollar basis. You can use $3,000 of net capital losses in excess of capital gains to offset ordinary income. Any excess left over can be carried forward to 2010.
• But watch out for the wash-sale rules. The Internal Revenue Service disallows losses on securities sold if substantially identical securities are bought within 30 days before or after the loss sale. Best case: Buy 31 days later.
• Bunch your medical expenses if you can. Only those medical expenses in excess of 7.5% of your adjusted gross income are allowed as deductions. So if your adjusted gross income is $100,000, you get no deduction for the first $7,500 of your medical expenses. But there are some medical expenses you can defer or accelerate, depending on whether you expect to exceed this floor. Elective surgery, orthodontia or the payment of your medical insurance premiums can all be advanced or postponed to meet your minimum floor.
• Miscellaneous itemized deductions. These are allowed only to the extent they exceed 2% of your adjusted gross income. If you're going to exceed the 2% floor, then accelerate your deductions. Prepay your accountant in 2009 to do the tax return that you don't have to file until April 2010. Late in 2010, prepay your accountant for your 2010 return. Renew and pay for your investment publications before the end of the year. If you don't have the cash, charge these expenses. The charges are allowed in the year of the charge, not when you actually pay your credit card bill.
• Accelerate payments that can produce tax deductions. If you write and mail your January 2010 mortgage check (or send it in online) or the check for your fourth-quarter property taxes by Dec. 31, 2009, you can claim the interest deduction or real estate tax deduction in 2009. If you write and mail your January 2011 return before Dec. 31, 2010, you can claim the interest and taxes in 2010.
• Get the most out of noncash charitable contributions. Give your old clothes, furniture and equipment to your church, synagogue, Salvation Army or Goodwill before Jan. 1, 2010, and take a 2009 deduction for the fair market value. Likewise, in 2010, make sure you donate your goods before Dec. 31 to claim a deduction on your 2010 return. Make sure you get a receipt: No receipt means no deduction. In addition, with clothing and household items, the donation must be in good condition.
• Plan your tax payments. A few years ago, an MSN Money survey on taxes indicated more than 53% of the respondents expected a refund of more than $1,000. That's a whole lot of money left interest-free with the IRS.

You want a big refund? Send me your money. I'd be happy to send it back to you, interest-free, before April 15.

Otherwise, shoot for the safe harbors: 90% of the current year's total tax or 100% of your prior year's total tax (110% if you prior year's adjusted gross income was more than $150,000). Hit those targets, and, no matter how much you owe April 16, there won't be any interest or penalties if you pay the balance in a timely manner.

For 2009, a qualifying taxpayer with a small business can base his 2009 estimates on 90% of his 2008 tax total.

Adjust your withholdings to meet these targets. If you expect to pay next year, put the withholding difference in a money-market account. At least then you'll be picking up any interest.

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

Plan for the Alternative Minimum Tax

The AMT, or Awfully Mean Tax, has been destroying my clients' refunds. What can be done?

If you expect to be hit by the tax, reverse many of your typical planning strategies. Defer, rather than accelerate, those items that aren't allowed as deductions for the Alternative Minimum Tax. Such expenses include other taxes, employee business expenses, investment expenses and job-search costs.

The AMT is a flat 26%/28% tax. If you're normally in a higher bracket than that, accelerate your income. Such income will then be subject to the lower AMT rates. For more on this, see "Don't get bitten by this Awfully Mean Tax."

Meanwhile, the U.S. tax law is going to change. Plan your tax year under current rules. But keep on eye out and watch here for updates. The law will change. And, when it does, MSN Money will be here to guide you through the new rules.

Updated Nov. 23, 2009

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