Cut your 08 taxes now!

Last Chance to cut '08 taxes

This is an article I read I thought was great. I did not write it, just sharing it!

Give yourself a holiday present: Act before Jan. 1 to minimize what you'll pay Uncle Sam in April.

The holidays are here, and they definitely will divert your attention.

This is my last -- AND LOUD -- reminder to take a few minutes from your holiday merrymaking to 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 are moves to make now:

Capital gains and losses

Normally, I'd start with the simplest things, but I'll start with probably the most painful subject to deal with: your investments.

For many investors, 2008 has been, well, dreadful. The Dow Jones Industrial Average and the Standard & Poor's 500 Index are down as much 40% on the year. And that's actually an improvement over November's lows.

But let's turn those losses to good use.

You can write off those losses against, first, any capital gains. So, if you have a stock or a mutual fund that you've owned for a year and is showing a decent gain in that time (such as Wal-Mart Stores or McDonald's, the only Dow stocks with gains this year), look for another stock or a mutual fund that's a loser.

If you sell the winner, you can offset your gain, dollar for dollar, by selling the loser.

And make sure you've put the sell orders in by Dec. 31. (Make your broker give you written confirmation.)

If you don't have any winners, not to worry. You can sell your losers and offset as much as $3,000 in ordinary income for 2008. Anything exceeding $3,000 can be applied, first, to offset 2009 capital gains and then to offset ordinary income in 2009.

But remember: To get the tax treatment, sell by Dec. 31.

Generally speaking, all net long-term gains are subject to a maximum 15% rate. But if you're in the 10% or 15% tax bracket for 2008 through 2010, you get a break. Your gain will be subject to zero tax. (Zero is one of my favorite words.)

If you're single with taxable income of $32,500 or less, you get the zero rate. With a standard deduction of $5,450 ($5,700 for 2009) and a $3,500 ($3,650 for 2009) personal exemption, you can have as much as $41,500 in gross income and still qualify. (Likewise, joint filers can qualify with as much as $83,000 in adjusted gross income.)

If you have shares of stock pregnant with miraculous 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.

One bit of bad news: If your losses are inside a retirement account, you can't deduct them. On this, I am sorry.

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, before filing your tax return, make sure you have receipts from the organizations that benefited from your generosity.

If you don't have the cash, find out whether the organization can process a donation via credit card. As long as the donation is made by Dec. 31, it's valid as a 2008 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 are the requirements that the IRS instituted in 2007 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.

Your flexible spending account

This isn't exactly a tax savings, but if you don't use the dollars you contribute to a flex plan, you lose them.

The IRS allows purchases made through March 15, 2009, to count. Your employer can give you a debit card for your flexible spending account. You can even pay for nonprescription drugs through an FSA. That eliminates a whole lot of paperwork.

Be careful, however. The IRS may allow the extended March 15 date, but, unless your employer's plan is amended to allow it, you won't qualify.

Real-estate taxes

If you pay your own real-estate taxes, make any payments due in the beginning of 2009 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.

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. www.go2joe.com

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 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 2009. 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 $15,500 in 2008 and $16,500 in 2009. If you're 50 or older, you can put in an additional $5,000 as a catch-up contribution in 2008 ($5,500 in 2009).

Cash gifts

Could your estate be taxed?

If so, lessen the burden on your heirs by making a tax-free gift of up to $12,000 before the end of the year. The tax free amount increases to $13,000 per recipient in 2009.

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 2008 -- and 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 2009 unless Congress renews it. (A renewal is a good bet, however.)

Is the AMT in your future?

I fully expect some relief from the alternative minimum tax. But if we don't get it, I encourage you to really yell at your representative and senators for not getting the job done.

More middle-income taxpayers are being hit with the AMT each year, which is basically a parallel tax system designed to ensure that everyone pays some tax. It is, however, forcing more people to pay more tax than it should.

This fall, Congress extended the AMT exemption, increasing the exemption for 2008 to $69,950 ($34,975 for married couples filing separately). That's up from $66,250 in 2007 -- or $33,125 for married couples filing separately. For singles, the limit is $46,200, up from $44,350 in 2007.

But the extension is good for 2008 only. Congress will have to extend it again in 2009.

Watch this carefully because the issue hasn't been resolved, and the lack of resolution could cost you.

Good luck in the hunt to reduce your taxes! www.go2joe.com

Lower Rates could mean great deal!

Six Things to Know About the Fed Rate Cut

The Federal Reserve on Tuesday cut its federal funds target rate by more than three-quarters of a percentage point to a range of between 0 and .25 percent. The decision signals that Fed Chief Ben Bernanke is more concerned with the rapidly deteriorating economy--which has been mired in a recession since December of last year--that the prospect of stoking inflation. "Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the rate-setting Federal Open Market Committee said in its statement. "Financial markets remain quite strained and credit conditions tight."

Here's how the Fed's actions affect you:

1. Fixed mortgage rates: Today's rate cut will have little if any impact on 30-year fixed mortgage rates, which are determined by factors that operate largely outside of the Federal Open Market Committee's reach, says Keith Gumbinger of HSH Associates. "Any change in the rate has little to do with long-term mortgage rates," he says. But in its statement the Fed said it could expand a recently announced program to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac that has already driven mortgage rates down to a very attractive 5.28 percent, according to HSH Associates. It also reiterated that it was looking at the possibility of buying long-term Treasury bonds. Both of these announcements could work to bring rates even lower.

2. Prime rate loans: The real impact of today's cut will be felt by consumers with loans that are tied to the prime rate, a benchmark rate that typically moves in lock step with the federal funds rate. "The only place where you would see a concrete impact at the consumer level would be things that are directly tied to prime," says Mike Larson, a real estate analyst at Weiss Research. Many home-equity lines of credit and certain credit cards with variable interest rates are tied to prime rate. As such, borrowers with these loans could see their interest rates decline.

3. Home-equity savings: Home-equity loans averaged 5.5 percent in October but dropped to 5.26 percent in November following the Fed's half-point cut. Gumbinger says he expects average rates on home-equity lines of credit to experience similar declines this time around--but not everyone will be able to take advantage of them. That's because many of the interest rates on these loans are already at their minimums, and are contractually prohibited to go any lower. So check the terms of your home-equity loan to see if you are eligible to cash in on the decline.

4. Target vs. effective: When credit markets are functioning normally, Fed rate cuts reduce banks' cost of funding, which allows them to widen profit margins and pass along savings to consumers in the form of lower interest rates. But today's credit conditions have changed all that. Although the Fed's target rate stood at 1 percent before today's cut, such funds were actually being traded in the market at much less than that--just 0.18 percent as of yesterday before the Fed's action. Although the Fed can usually control the effective rate by buying and selling government securities, the credit crisis has eroded its ability to do so. "Any juice that you would get from a funds rate cut in a normally functioning market, you're not really going to get that here," Larson says. "It's not going to lower the banking industry's cost of funds, because the banking industry's cost of funds is already below the target rate anyway." That means that interest rates tied to the federal funds rate won't decline as much as they otherwise would have.

5. Now what? Nariman Behravesh, chief economist at IHS Global Insight, expects rates to go all the way to zero in a matter of weeks. "The Fed has already cut the federal funds rate to 1 percent and is likely to take it all the way to zero by the end of January," Behravesh said in a recent report, issued before today's announcement. "Once the overnight rate is at zero, the Fed may have to engage in 'quantitative easing' [direct purchases of long-term Treasuries]." Even if it doesn't bring rates all the way to zero, the Fed signaled Tuesday that it's not about to push rates higher anytime soon. "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the Fed said in the statement.

6. Expect more unexpectedness. With only less than a quarter of a percentage point left to cut, look for the Fed to get even more creative in its efforts to revive the financial markets. New programs to support different corners of the credit market could certainly be introduced in 2009. "The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the Fed said in the statement.