Please enable JavaScript to view the comments powered by Disqus.

Tax Planning

Find Extra Cash By Trimming
Your Tax Bill

You can cut your tax bill for 2009 to the core by taking all of the breaks -- both new and old -- that you deserve.

EDITOR'S NOTE: This article was published in the February 2010 issue of Kiplinger's Retirement Report. To subscribe, click here.

The bear market may be over, but that doesn't mean you're feeling flush. So where can you find some extra bucks? Try your tax returns.

You can cut your tax bill to the core by taking all of the breaks that you deserve. Congress approved numerous changes to the tax code last year. The first $2,400 of unemployment compensation even gets a bye from the IRS.

If you don't qualify for new breaks, plenty of old ones can trim your tax tab. Many are easy to overlook, such as the extra standard deduction for seniors, a property-tax write-off for nonitemizers and deductions of Medicare premiums.

The benefits of the standard deduction. No longer have mortgage interest to itemize? There are more reasons than ever to claim a standard deduction rather than face the hassle of itemizing. For one thing, the standard deduction is higher for the 2009 tax year. Also, Congress offers several additions to the standard deduction -- all figured on Schedule L.


For 2009, the standard deduction for single filers increases to $5,700. For married couples filing a joint return, the standard deduction rises to $11,400, and heads of households can claim $8,350. If you're 65 and older, married couples filing jointly get an additional $1,100 each, and singles get $1,400. So, if both husband and wife are 65 or older, the standard deduction on a joint return is $13,600.

As in 2008, homeowners who don't itemize can add $500 ($1,000 if married and filing jointly) to their standard deduction amount if they paid at least that much in real estate taxes. And if you bought a new car, light truck, motorcycle or motor home in 2009 between February 16 and December 31, you can add the sales tax paid to your standard deduction amount. Tax on the first $49,500 of the cost qualifies.

The write-off for sales taxes phases out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers). The deduction applies for each car you buy. Taxpayers in states without a sales tax can deduct fees or other taxes assessed by the state or local government on the vehicle.

For 2009, taxpayers who don't itemize can add casualty losses to their standard deduction amount if the loss occurred in a federally designated disaster area. The loss starts as the lesser of the adjusted basis or the decrease in the fair market value of the property, says Mark Luscombe, principal tax analyst at CCH, a provider of tax information. You must subtract $500 to arrive at the deductible amount.


Say you bought a house for $100,000 20 years ago and the house was worth $500,000 in 2009. A hurricane inflicted $200,000 in damage not covered by insurance. You could claim a loss of the $100,000 basis (the original cost) minus $500, Luscombe says.

The downside of Making Work Pay. The adjusted withholding tables used to deliver the Making Work Pay tax credit during 2009 could cause pocketbook pain now. Some taxpayers "may be in for an unpleasant surprise of owing money or getting a smaller refund than they anticipated," says Bob Scharin, senior tax analyst for Thomson Reuters, a business and tax information publisher.

For 2009 and 2010, the tax credit is worth 6.2% of earned income, up to a top credit of $400 for individuals and $800 for married couples. The credit begins to phase out at $75,000 for individuals and at $150,000 for couples. Employers distributed the credit during 2009 by withholding less in taxes from paychecks. You'll need to claim the credit (using Schedule M) on your 2009 return to reduce your tax bill in line with the reduced withholding.

But 15.4 million taxpayers could unexpectedly owe taxes for 2009 because of the credit, according to the Treasury Inspector General for Tax Administration. That's because the revised withholding tables didn't take certain circumstances under consideration. If you hold two part-time jobs, for instance, each employer reduced withholding, effectively delivering two credits. And pensioners, who are not eligible for the credit, may have had less tax withheld from retirement benefits than they should have. Also, working Social Security beneficiaries who received the one-time $250 stimulus payment are not eligible for the full credit.


Home sweet tax break. If you bought a new home late last year or sign a binding contract for one by April 30, you could be eligible for a new federal tax credit. Congress has expanded the definition of first-time buyer to include longtime residents who have owned and lived in the same principal residence for five of the eight years leading up to the purchase of a new home. The credit, available for purchases after November 6, 2009, is equal to 10% of the purchase price of the new home, up to $6,500.

The $8,000 credit for first-time buyers -- defined as someone who has not owned a home for three years leading up to the purchase -- is available for purchases made at any time in 2009 and for deals with contracts signed by April 30. Neither credit applies to the purchase of a residence costing more than $800,000. And they both phase out for individuals with a modified adjusted gross income of $125,000 to $145,000 (between $225,000 and $245,000 for joint filers).

Even if the sale is completed in 2010, the credit can be claimed on either the 2009 or 2010 return. Some home buyers might want to delay if their income is too high to qualify for the full credit this year but likely to be lower in 2010. You can claim the home buyer's credit on Form 5405. Attach a copy of your settlement statement. Because the credit is refundable, you will get a check from the IRS if the credit reduces your tax bill below zero.

Make the most of losses. Your investments likely took a turn for the better in 2009, and you may be anxious to forget dismal 2008. But wait until you take advantage of any unused 2008 capital losses. Remember, only $3,000 of net capital losses can be deducted against other kinds of income. Any excess has to be carried forward to the next year. Check your records to see if you had carryover losses from 2008 that you can use to offset 2009 income.


Say you had $25,000 in carryover losses from 2008 and realized $15,000 of capital gains in 2009. The losses wipe out the gains dollar for dollar -- saving you $2,250 in tax -- and you can use $3,000 more of the loss to offset other income. And you'll still have $7,000 of loss to carry over to next year.

If you have net gains, you may be in for a happy surprise. For taxpayers in the 10% or 15% tax bracket, the 2009 rate on long-term gains is the sweetest of all: 0%. To qualify, your 2009 taxable income can't exceed $33,950 for individuals and $67,900 for couples.

The 0% capital-gains rate only applies until your income breaks through the top of the 15% bracket. Say you're married and your taxable income -- not counting long-term gains -- in 2009 was $50,000. If you sold stock for a $30,000 profit, the first $17,900 is tax-free. The balance -- which pushes your taxable income into the 25% bracket -- is taxed at 15%.

State sales or income taxes? Congress extended through 2009 a popular tax break that allows taxpayers to choose between deducting state and local income tax or state and local sales tax. In states with an income tax, the income-tax deduction is likely to make the most sense. If you live in a state with no income tax, such as Florida and Texas, a sales-tax deduction would be the most beneficial.

But there are exceptions. Pennsylvania, for example, has an income tax, but retiree income is treated especially favorably. "In a state that doesn't tax pensions, Social Security and IRA distributions, retirees would be generally better off deducting the sales tax," says Robert Jazwinski, a certified public accountant and president of JFS Wealth Advisors in Hermitage, Pa. (For information on taxes in your state, go to Retiree Tax Heavens (and Hells).)

A cure for medical expenses. You can get a break on medical expenses that exceed 7.5% of adjusted gross income. For example, if your AGI was $70,000, only medical costs above $5,250 are deductible. If your AGI is $40,000, the threshold drops to $3,000.

After Carol Auten retired in 2007 as payroll-tax manager for a large retailer, her income fell enough for her to begin deducting medical expenses. And she makes the most of it.

She deducts her Medicare Part B and Part D premiums, out-of-pocket doctor and drug costs, and miscellaneous items such as thermometers and eyeglasses. "I use a credit card at the pharmacy so that I can keep track of my expenses," says Auten, who splits her time between Basking Ridge, N.J., and Myrtle Beach, S.C.

For 2009, she'll add the cost of airfare, part of her lodging and a rental car that she needed during a visit to an out-of-town clinic. She figures she drove 1,230 miles to doctor visits in 2009, which, at an allowable 24 cents a mile, is worth a $295 deduction.

Also deductible are premiums for long-term-care insurance up to $1,190 for those ages 51 to 60, $3,180 for those 61 to 70, and $3,980 for those 71 and older. Certain home improvements, such as wheelchair ramps and support bars, can be deducted, too. If you are moving into a retirement community that promises lifetime medical care, a portion of the entrance fee or monthly fee may be deductible. You can use a statement from the retirement home to set the amount properly allocable to medical care.

Sale of demutualized stock. Taxpayers won a court battle with the IRS in 2009 over the issue of demutualized stock. That's stock that a life-insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a company owned by stockholders. The IRS's position is that such stock has no cost basis, so that when the shares are sold, the taxpayer owes tax on 100% of the proceeds of the sale.

Last year, a federal court ruled that the IRS is wrong. The court didn't say what the basis of the stock should be, but many experts think it's the market value when shares were distributed to policyholders. If you sold stock in 2009 that you got in a demutualization, you can cut your tax bill by claiming basis when you report the sale proceeds on your Schedule D. The IRS may appeal. If you claim a basis and the IRS audits your return and challenges your position before the matter is finally settled, you might have to fight for the tax benefit.

For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger's Retirement Report.