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Year End Real Estate & Additional Tax Tips

December 13, 2009

This is your final reminder to take a few minutes from holiday merrymaking and get those last-minute tax moves done. You have until Dec. 31. After that, there’s little you can do to cut your tax bill.

Here’s what you can do before the end of the year to trim your 2009 tax bill. I’ll start with the simple things.

What you need to do now

Mortgage interest. Make your January mortgage payment Dec. 31. Send in a check or pay it online.

Remember to add the interest you paid to what your bank reports on its Form 1098. Your bank will get your payment in 2010 and won’t report it for 2009.

But because you paid it this year, it adds to your 2009 deduction. (The downside, of course, is that you won’t be able to deduct the payment from your 2010 return.)

Real-estate taxes. If you pay your own real-estate taxes, make any payments due in the beginning of 2010 by Dec. 31. My fourth-quarter real-estate taxes are due Feb. 1. By paying them Dec. 31, I get the deduction a year earlier. (Again, you can’t deduct payments made in 2009 from your 2010 return.)

A friendly warning: Taxes aren’t allowed as a deduction under the alternative-minimum-tax computation. If you expect to get hit by the AMT, don’t prepay.

Charitable donations. If you contribute to your church, your college, the local dog pound, United Way or organizations contributing to disaster relief, make these donations by Dec. 31. And make sure that before you file your tax return, you have a receipt from the organizations that benefited from your generosity.

If you don’t have the cash, find out if the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it’s valid as a 2009 deduction.

Separately, any contributions of clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, you will need an appraisal. The Internal Revenue Service can deny deductions for items of minimal value.

Complicating any deductions will be new requirements on record keeping. This is important.

To deduct a cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing its name and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.

Medical and miscellaneous deductions. Medical expenses and miscellaneous itemized deductions have “floors.” For medical expenses, only those in excess of 7.5% of your adjusted gross income (AGI) count. Miscellaneous itemized expenses have to exceed 2% of your AGI to qualify.

An important point: Your health insurance premiums count so long as you’re not paying them out of a flexible spending account.

If you’re going to exceed the floor, accelerate your expenses. Prepay your orthodontist or your tax preparer. Send in your payment either online or via the U.S. mail by Dec. 31. Alternatively, if you’re not going to exceed your floors, defer the deductions to 2010. You may exceed your floors then.

Pension or IRA contributions. These are especially important if you are self-employed. Unless tax rates shoot up, you want to pay your tax “tomorrow” rather than today.

If you’re contributing to a retirement plan such as a 401(k) plan or a 403(b) plan, you can put in $16,500 this year and the same amount in 2008. If you’re 50 or older, you can put in an additional $5,500 as a catch-up contribution.

Cash gifts. If you might ever be subject to the estate tax, make your $12,000 tax-free gift before the end of the year.

Capital gains and losses. 2009 has been a volatile year for investors, if you are one of the lucky who have capital gains, remember that any net capital losses over the $3,000 allowed on your 2008 tax return should be carried forward to offset those 2009 gains. If you still have net losses, up to $3,000 may be used to offset ordinary income for 2007.

All net long-term gains are subject to a maximum 15% rate. If you’re in the 15% or lower tax bracket, your tax hit is softened to only 5%.

If you’re single with taxable income of $31,850 or less, you get the 5% rate. With a standard deduction of $5,350 and a $3,400 personal exemption, you can have as much as $40,600 in gross income and still qualify.

If you have net capital gains, sell losers to offset those gains. If you have more losers, sell at least enough to get the $3,000 offset against ordinary income. If you have shares of stock pregnant with gains and you don’t expect them to appreciate further, sell those shares and shelter the gains with the losses on your losers. Worst case: Pay the maximum 15% tax. You can’t go broke taking profits.

Tax-free IRA distributions to charities. If you’re 70 1/2 or older and looking to make a donation to a favorite cause using funds from your individual retirement account, this may be the year to do it. For 2009, you can distribute as much as $100,000 directly from your IRA without recognizing any income.

You don’t get a charitable-donation deduction (unless the distribution was from a Roth IRA), but the distribution does count toward your minimum-distribution amount.

A note: This provision will expire after Dec. 31 unless Congress renews it. A renewal is expected, however.

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