Cut Your Taxes
Money-saving moves your accountant is likely to overlook
Mike the accountant has been doing my
taxes for 15 years. I’d always pegged
him for a guy who worked all the time
and spent his few off-hours sacked
out in front of the television. Then, at
our last sit-down, I casually asked after Mike’s wife.
“Uh, I got divorced and remarried…and I have two
new kids,” he said. Who knew? Mike the accountant
actually has a life, one that is as filled with failure and
triumph as yours or mine.
More important, so do his clients. But Mike knows
nothing about my family except for what’s on the
W- 2 and in our receipts. And what your accountant
doesn’t know can cost you money. There are plenty
of potentially tax-saving moves that you might be
making—or be willing to make—but it never comes up
in your once-a-year conversation. “Often it’s just ‘Give
me the data; here are your returns,’ ” laments Gary
Schatsky, a New York–based financial planner.
So, rule number one is to get in touch with your
accountant before the end of the year, when he’s
not crazed, and discuss ways to minimize your tax
exposure. Once receipt-dump season rolls around, it’s
too late. We consulted accounting experts and financial
planners to find ways to save money that Mike never
mentioned. DEVIN LEONARD
from your tax
It’s Time to Weatherproof
Three years ago, Congress
instituted tax credits for insulating
homes and buying energy-efficient
appliances such as boilers. The
tax break was not in effect last
year, but it is back in effect for
2009. (Government logic: Energy
efficiency makes sense only
occasionally.) Just be sure to tell
your accountant about those new
double-pane windows. “I’m not
going to know if a client has made
a home improvement unless he
tells me,” says Kristine McKinley, a
financial planner in Lee’s Summit,
Missouri. Some hybrid vehicles,
such as the Ford Escape, will also
earn you a tax credit. And families
who buy a first house after April 8,
2008, and before July 1, 2009, are
entitled to a $7,500 tax credit. (More
logic: Buy a house on July 2 and you
Avoid Double Taxation
A smart tax move is to sell
clobbered stocks and deduct the
losses. (Then reinvest the cash
immediately in different stocks).
If you haven’t done so, do it now.
But a lesser-known trick is to avoid
double taxation on dividends paid
by your mutual funds. Ed Slott, a
New York accountant, explains
that as stocks in your funds pay
dividends, you pay taxes on that
payout, even though many fund
companies reinvest the dividends
instead of paying them out to
shareholders. Here’s the problem:
Once you sell the fund, you are
taxed on your gains, even though
some of that gain is dividend income
you have already paid taxes on.
Ask your accountant to look at your
old tax returns to see what the IRS
has billed you for, and then adjust
accordingly. “Most people don’t
know to question that,” says Slott.
“Your accountant might not either.”
Did You Convert Your IRA?
Many investors converted
traditional IRAs to Roth IRAs last
year as the market fell, because
fewer taxes are incurred when
the market is down. The problem?
Stocks kept falling. So if you sold,
say, after losing 20 percent, you
owe more than if you’d waited
for the full 40 percent drop. But
those taxes disappear if you
change your Roth back to a plain-vanilla IRA before April 15. As far
as the IRS is concerned, it’s as
though the original switcheroo
never happened. You can always
reconvert after 30 days.
TAX TIPS FOR A POST-BAILOUT WORLD How to keep the IRS from getting every last cent
While we don’t know for sure what impact the Obama administration will have on our wallets, we do know that the Bush tax cuts are likely to be repealed
at some point. Someone has to pay for all those bailouts, and it’s likely to be you. Here are three moves to protect your cash flow.
BUY MUNICIPAL BONDS TAKE LONG-TERM CAPITAL GAINS PLAN CHARITABLE DONATIONS CAREFULLY
Higher tax rates make tax-free investments even This year may be your last chance to sell an If you expect your taxes to go up substantially
more valuable. If the top marginal rate goes to investment—whether it’s stock or your lakefront next year, postpone any major charitable
39. 6 percent—and some fear it could go higher— cottage—and pay taxes at what could be gifts until 2010, says financial planner Kristine
a muni bond that yields 5 percent will have the tax remembered as a very low rate ( 15 percent), McKinley. That way, you’ll capture more tax
equivalent yield of about 8 percent (or higher if says Stewart Welch, a financial planner in benefits. D .L .
you pay state and city taxes). What’s more, munis Birmingham, Alabama.
might increase in value as investors rush in.