Refresh Your Financial Life: Taxes

The market rally of 2009 helped Americans make up some the ground they lost in the crash. But to make the most of the ongoing economic rebound, many investors will have to tweak their game plans. SmartMoney magazine’s December cover story, “Refresh Your Financial Life,” offers strategies for dealing with the shifting landscape.

For consumers looking to refresh their overall financial strategy, every penny counts. That’s why experts say year-end tax planning will be particularly important in 2009. The government’s efforts to boost the economy have created what Claudia Hill, editor of the Journal of Tax Practice and Procedure, calls “a bunch of screwy little changes” in the tax code. But some of those changes can put money back in taxpayers’ pockets.

STIMULUS SAVINGS
The ballyhooed Cash for Clunkers program may be over, but consumers can still get a break on new vehicles. The stimulus bill allows a deduction for state and local sales tax on any new car, motorcycle or motor home purchased this year for up to $49,500. “It’s a huge incentive to buy before the end of the year,” says Melissa Labant, tax manager with the American Institute of Certified Public Accountants.

CAPITAL GAINS
After selling thousands of dollars’ worth of stock during the market surge, retired investor Michael P. Morgan of Fort Myers, Fla., expected to face a hefty capital-gains tax bill. Instead, he’s getting a nice surprise: Most of those gains will be tax-free. That’s because of a little-known provision of the tax cuts passed in 2003, under which singles making less than $33,950 and couples with income under $67,900 are eligible for a zero-percent rate this year and next. (Capital gains count in the income tally, but only gains that come in over the threshold get taxed.) In Morgan’s case, his wife’s retirement this year lowered their income dramatically, and charitable contributions and other deductions helped the Morgans squeeze under the income limit. “It was incredible,” Morgan says. Other investors may have helped themselves on the tax front by selling stocks at rock-bottom prices early this year, says Adam Spiegel, a Miami-based accountant. Many of them have reaped the $3,000 maximum in capital losses that the IRS allows taxpayers to deduct in a given year. Investors can use those losses to offset gains they snared in the subsequent rally, helping them keep their tax bill lower.

THE UNEMPLOYED
For the millions of Americans who spent part or all of 2009 involuntarily unemployed, the tax code offers at least a smidgen of solace. Under the stimulus bill, the first $2,400 in unemployment benefits earned in 2009 is exempt from federal taxes. And job-search expenses and many of the costs of being self-employed can be tax deductible, provided they amount to more than 2 percent of income.

ALTERNATIVE MINIMUM TAX
The AMT was designed decades ago to make sure the very rich didn’t dodge taxes by piling up deductions. But after years of inflation, it now hits more than 4 million Americans, many of whom don’t consider themselves rich. Congress’s latest patch increases the AMT exemption this year to $46,700 for singles and $70,950 for married couples. A complex range of factors determines who gets whacked; most tax-preparation software can help taxpayers figure out if they’re in the crosshairs. For those who are close to the borderline, one way to avoid being hit is to shift some income to next year from the current one—by deferring a bonus, for example, or waiting until after Jan. 1 to invoice a client for a payment.

Correction note: An earlier version of this story included incorrect figures for the income thresholds below which taxpayers can reap tax-free capital gains.