It’s time for end of year tax planning! Time to get your financial house in order for tax season! It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards! Here’s your list of money moves to make before the new year.

Year End Tax Moves

1. Run a preview. Purchase your copy of TaxCut from H&R Block, which I have used in the past, or Turbo Tax, early to run some estimates. When possible, I like to get my software before year end to start running projections.
2. Take your losses. As long as you have lost money on your investments, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years.
3. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
4. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
5. Install energy efficient upgrades. Take advantage of the energy tax credit in 2009. We used ours in 2006, and there’s nothing better than a tax credit for something you were planning to do anyways. Check the product list for all eligible products and limits.
6. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize.
7. Give away your money. If you were planning to give a lot of money to someone special, utilize your yearly gift exclusion of $13,000 in 2009. More than that and you are subject to the gift tax.
8. Claim your first time home buyer credit. The $8,000 First Time Home Buyer Tax Credit can be used in 2009 if you bought a home.
9. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests.
10. Skip your RMD. If you (or your older relatives) are facing required minimum distributions, don’t forget that Required retirement withdrawals are waived in 2009.
11. Plan time to sell drips. Plan ahead if you need to consolidate certificates and book entry shares from drips. I requested certificates so I could sell them for free at Zecco but I don’t think I’ll get them in time to execute the sale. If you need to make the sale before year end, consider a direct sale instead of a transfer to your broker.
12. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to donate. For example, you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
13. Finalize your records. If you plan to Deduct Mileage on Your Personal Car make sure your mileage logs are complete. Remember you will save yourself time by being Organized & Prepared to Do Your Taxes Quickly!
14. Review your checklist. Last year I covered End of Year Tax Planning and Finance Checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order.
15. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
16. Close your IRA. If you carefully evaluated the pros and cons, and decided to Take a Loss on an IRA, close your account before year end to claim your loss on your taxes this year.
17. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves.

This article was updated for 2009 end of year tax planning. The original article was published in December 2008.

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Cash for Appliances Program

Back in August, Cash for Clunkers was the big news in government relief for taxpayers. The program encouraged consumers to buy nearly 7,000 more fuel efficient vehicles in less than 30 days. A similar program from the Department of Energy through the American Recovery and Reinvestment Act of 2009 is now in the works. The State Energy Efficient Appliance Rebate Program, or “Cash for Appliances,” aims to encourage Americans to upgrade to more energy efficient appliances.

Cash for Appliances Features

• State-Run: Unlike Cash for Clunkers, where the Federal Government ran the program, each state is responsible for its own Cash for Appliances program. That means program rules, dates, and savings vary by state.
• Old Appliances: Your old appliances won’t be exchanged for the rebate on your new appliances. The good news is that those who are buying, for example, a new washing machine and have never had one before, will still be eligible for the rebate. The bad news is that you’re responsible for getting rid of your own old appliances. Be sure to recycle though because some states, like New York, will offer additional incentives for doing so!
• Energy Star: The new appliances must be ENERGY STAR® qualified in order to be eligible for any rebate. Categories eligible for rebates include: central air conditioners, heat pumps (air source and geothermal), boilers, furnaces (oil and gas), room air conditioners, clothes washers, dishwashers, freezers, refrigerators, and water heaters.

Overall Thoughts

As with Cash for Clunkers, this program shouldn’t make you run out and buy a new appliance you don’t need or can’t afford. The rebates can be as little as $50 so that definitely wouldn’t be a wise decision. However, if you’re in the market for a new appliance anyway and your state is offering one of the better incentive programs, it probably makes sense to take advantage of this program while it lasts…remember how quickly Cash for Clunkers ran out of funds!

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You know the drill: once or twice a month you get paid for the time that you have worked, minus a series of taxes that have been conveniently deducted out of your paycheck before you even receive it. Because you never get to deposit that money into your bank account, paying taxes may seem like wasted money. In actuality, taxes are an untapped resource that pay for and subsidize many services and programs in your community.  

Programs Funded By Your Tax Dollars

Below is a list of resources that are free or subsidized by your tax money. Check with your local county or city government to see if these programs and services are available in your own area.

1. Free tax prep service for low to middle income families. Instead of paying for an accountant or tax prep professional next April, use the volunteer tax service your tax dollars have prepaid for.
2. Subsidized compost bins and free compact fluorescent lightbulbs (CFLs). Many local governments, electric companies, and communities have implemented programs to increase environmental awareness and to decrease energy use. Take advantage of this by purchasing a subsidized compost bin for your garden, signing up for a free CFL lightbulb, etc.
3. Free classes. Most communities offer free classes in accounting (for personal finance), Spanish language, ESL (English as a second language), basic computer skills, exercise (outdoor community yoga is always fun!), resume writing and job searches, etc. Some other fun classes I have found are for learning how to compost, local gardening instruction, and cooking. You may be surprised what classes are offered.
4. Parks, and environmental education. Parks are a wonderful opportunity to get outside and enjoy nature. Many parks offer free canoe rentals (or a subsidized cost that is cheaper than a private canoe rental place), tours, environmental education classes, outdoor barbecue pits (bring some foil if you don’t like the idea of cooking after someone else), fire pits, etc. You can use park grounds for birthday parties, anniversary parties, or other parties for free or a small donation, saving you money on event planning. Upkeep of the parks and all of these programs are funded through your tax dollars.
5. Use of facilities­. Community fitness centers are much cheaper than private gyms (memberships are often half the price). Libraries have books to borrow as well as DVDs, and you can take advantage of the Interlibrary Loan System (ILL) to borrow books and DVDs from many libraries around your state, giving you much better variety with a little bit of patience.

What programs have you used that were paid for with your taxes?

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We’re continuing to detail specific benefit options with a look at Health Savings Accounts, or HSAs. Yesterday we looked at High Deductible Health Plans. Because of its lower premiums, an HDHP makes financial sense for many people. If you have an HDHP, you are also eligible to contribute to an HSA and save even more money on medical expenses.

HSA basics

• Definition: An HSA is a special type of savings account – a tax-advantaged way to pay for qualified medical expenses incurred while covered by an HDHP. HSAs can be held in simple interest-bearing savings accounts. Some plans will also allow you to invest in higher-earning instruments, allowing your contributions to grow significantly when invested properly.
• Eligibility: To be eligible to open and contribute to an HSA, you must be over 18 and covered by an HDHP that conforms to IRS standards. You may not have any other kind of medical insurance plan in addition to the HDHP, including Medicare. Finally, you cannot be claimed as a dependent on someone else’s tax return. Employers that offer an HDHP usually offer and manage an HSA as well. If you have individual health insurance you can sign up for an HSA through your insurance company or many banks/credit unions.
• Contributions: If you are an individual covered by an HDHP, you can contribute $3,050 in 2010 ($254/month). Covered families (including participant plus spouse, children, or both) can contribute $6,150. Your employer may contribute, but total contributions cannot exceed the above limits. Individuals can also contribute an additional $1,000 per year if they are 55 or over. These amounts are reduced if you do not remain covered by the plan for the entire year. You cannot contribute once you stop being covered by an HDHP due to retirement, employer changes, or plan changes, but the accumulated contributions and earnings are yours to keep.
• Withdrawals: Withdrawals for qualified medical expenses are tax-free. Many HSAs will provide you with a debit card so that you can pay expenses directly. Others will require you to file paperwork for reimbursement. Withdrawals for non-medical expenses will be taxed as ordinary income. A 10% penalty will also apply unless you are over 65 or disabled.
• Qualified Expenses: All normal medical expenses, including anything that your HDHP deductible would apply to, such as prescriptions, are qualified expenses. You can also pay for dental or vision expenses as well as long term care insurance premiums or expenses. Finally, Medicare premiums and COBRA premiums are qualified expenses, as are other health insurance premiums if you are unemployed. Cosmetic surgery cannot be paid for out of an HSA.

How can an HSA work for you?

An HSA is tax-advantaged in three ways:

1. It provides an up-front tax deduction, reducing your taxable income by the amount of your contribution.
2. It allows for contributions to grow with no taxes on earnings.
3. You can make tax-free withdrawals for qualified medical expenses. The withdrawals can be made at any time, even if you are not covered by an HDHP at the time of the expense!

Choosing an HDHP will always save you money in premiums when compared to traditional medical plans. The only downside is meeting your higher deductible. An HSA helps you save to meet that deductible and spread medical expenses evenly throughout the year so that they do not have to impact your everyday budget. In addition, your employer may contribute to your HSA, thus paying a portion of your annual deductible. Employer contributions and tax savings are in addition to other savings you may realize by selecting an HDHP. If your employer does not offer an HDHP option, consider getting quotes on private health insurance- even without an employer subsidy, the HDHP/HSA combined savings might be enough to make it worth it!

Because there are no income limits for HSA eligibility, HSAs are a great way to plan for increased medical expenses in retirement. If you have an HDHP/HSA for multiple years, and choose to pay for medical expenses out-of-pocket instead of an HSA, you can even treat your HSA as a “super Roth” and make tax-free withdrawals later instead of in the year they are incurred – this strategy allows the money to grow tax-free as long as possible!

To open an HSA, select it during open enrollment with your employer or check with your private health insurance company, bank, or credit union. Be aware that non-employer sponsored HSAs may incur management fees. While those fees can be frustrating, they are almost certainly outweighted by the savings!

Final thoughts

If you have the option of choosing an HDHP at work, spend some time running the numbers to see how much the combination of an HDHP and HSA can save you. JP Morgan Chase provides three easy-to-use calculators, including a tax savings calculator. If you are already covered by an HDHP, there is no reason NOT to open and contribute to an HSA. HSA money never expires – the account and any incurred tax benefits are yours to keep throughout your life. Combined with HDHPs, they can save you thousands of dollars over the course of your lifetime.

For more on HSAs, check out this handy guide from The Department of the Treasury.

Update: Health Savings Account Changes are on the way. Check out the new rules and regulations.

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Good news for existing homeowners! You’ll finally be eligible to take advantage of the home buyer tax credit. When the President signed a bill today to Extend the $8,000 First Time Home Buyer Tax Credit, it also included a provision for existing homeowners, referred to as long-time residents.

To qualify as a long-time resident, you must have owned and lived in your current residence for at least five years of the previous eight years.

$6,500 Home Buyer Tax Credit

Here are the requirements for the $6,500 home buyer tax credit:

• You purchased your new home after November 6, 2009, and before May 1, 2010, or you have a signed contract by April 30, 2010 and you must close on the new home by June 30, 2010.Update: The existing home buyer tax credit is extended until Sept. 30, 2010.
• Income phaseouts will begin at $125,000 for single filers and $225,000 for married filing joint.
• The credit is for primary homes that cost $800,000 or less.

For instructions on how to get your tax credit, including the form to file with your taxes and what documentation you need to include, see How to Claim Your Home Buyer Tax Credit.

For more information, see the original First Time Home Buyer Tax Credit.

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