Don’t overlook these tax-saving ideas for 2008. You can use them during the rest of the year to reduce the money that you’ll owe to the IRS at tax time next spring. Strategies…
Example: A married couple with $40,000 of ordinary taxable income can receive up to $25,100 of dividends and long-term capital gains tax free.
How to use the 0% tax rate…
This way, well-off parents can help low-tax-bracket family members (other than children subject to the kiddie tax)… or children can help support low-income parents, all while reducing the total tax paid by the family to the IRS.
Use it or lose it: The 0% tax rate is scheduled to be in effect until December 31, 2010, but there is no guarantee that the new Congress elected this fall will keep it in place.
Even if the 0% rate stays in place, only a limited amount of income benefits from it, so you should use it each year on the full amount possible.
Until now, property taxes were not deductible except by those who filed itemized returns.
The new deduction will especially help seniors who have paid off their home mortgages and so don’t pay enough deductible mortgage interest to file an itemized return, but who are still paying property taxes on their homes.
Second chance: If eligible, you can claim the rebate payment on your 2008 income tax return, based on your 2008 adjusted gross income (AGI). The worksheet in the instructions to Form 1040 should be used to figure your rebate. You then claim this “rebate recovery credit” on Form 1040. It is not a separate check, as was the case for rebates paid in 2008 — it will simply reduce your tax liability or increase your tax refund.
People who don’t otherwise need to file a tax return but who are qualified for the stimulus payment will be required to file a 2008 return in 2009 to claim their payment if they did not claim it in 2008. These people include Social Security recipients, those receiving disability and certain other veterans’ benefits, and low-income individuals with at least $3,000 of earned income.
For instructions about how to claim the rebate on a 2008 return filed in 2009, see the instructions to the “Recovery Rebate Credit Worksheet” accompanying line 70 of the 2008 Form 1040.
Planning: Your RMDs are taxable income, so take your first RMD (for 2008) in the year you expect to be in the lowest tax bracket, 2008 or 2009.
Deadlines: If you started taking RMDs in 2007 or earlier, be sure to take your RMD for 2008 by December 31. Failure to do so results in a big penalty — 50% of the amount you should have taken.
Added opportunity: Avoid tax on your RMD by donating it to charity. Those age 70 and older can contribute their RMD up to $100,000 annually (in 2008 and in 2009) — there’s no tax on the distribution, but no charitable deduction can be claimed.
Savings tactics: If you will be over the 7.5% “floor” in 2008, accelerate doctor visits, purchases of drugs and medical supplies, and other medical costs into 2008 and pay for them by year-end.
Accelerating expenses from 2009 into 2008 will give a faster and larger deduction.
If you won’t be over the floor, you won’t get a deduction for 2008, so defer paying all medical costs possible into 2009. That way they may “pile up” above the 7.5% of AGI floor in 2009 to give a deduction on your 2009 tax return that you might not otherwise have.
Also: Take every medical deduction you can. For rules and a list of deductible items — including ones you might overlook — see IRS Publication 502, Medical and Dental Expenses.
Reducing your adjusted gross income (AGI) for 2008 can produce multiple benefits, including…
Examples: Medical expenses (7.5% of AGI), casualty and theft losses (10%), and miscellaneous expenses, which include unreimbursed employee business expenses and legal and investment expenses (2%).
Probably the best way to reduce AGI is to make a deductible contribution to an IRA… or a pretax contribution to an employer-sponsored 401(k) or a SIMPLE plan or a tax-deductible contribution to a Keogh plan for the self-employed.
People age 50 and older can make larger “catch-up” maximum contributions — $6,000 instead of the normal $5,000 to an IRA, and $20,500 instead of the normal $15,500 to a 401(k). Other ways to reduce AGI…