Tax Tips

What are some of the financial moves you can make to reduce your taxes and/or increase your personal financial wealth? Consider these options:

1. Retirement Accounts

The IRA deduction was increased to $5,000 per person ($6,000 if age 50 or older) as long as your income is less than $63,000 for single taxpayers and $105,000 for married taxpayers.
You can contribute up to $15,500 or $20,500 if you are 50 or over to retirement accounts at work such as 401K, 403B, and TSP. I know the stock market prices are down, but many financial experts believe your investment dollar goes farther when you invest during down periods. Alternatively, many retirement accounts offer safe, government funds if you fear further losses in the stock markets.

If you are considering a Roth IRA, the contribution amount begins to phase out with incomes exceeding $159,000 for joint filers and $101,000 for single taxpayers.

2. Flexible Spending Accounts

Consider flexible spending accounts where you can deposit a pretax portion of salary to pay for medical or dependent care costs. The 2008 limits are $2,900 for an individual and $5,800 for married couples. Please note that you lose any unspent portion of your contribution so you need to plan ahead.

3. Stock Gains and Losses

The stock market has dropped about 45% in the past year. If you sold stocks at a loss, you can deduct up to $3,000 in net losses in one year. Losses that exceed $3,000 can be carried over to future years. Meanwhile, the capital gain rate in 2008 was reduced to zero for single taxpayers who make less than $32,550 and married taxpayers who make less than 65,150.

4. Donations

Besides cash donations, you can claim non-cash donations such as clothing, household goods, computers, etc. Donated items are generally worth about 20% to 25% of the original purchase price. However, you must have a record of your contribution in a form of a cancelled check or a document from the charity that verifies the amount, the date, and the name of the charity.

5. Car Mileage Rate

If you use your car for business purposes, the standard mileage rate changed to 50.5 cents per mile on January 1, 2008. Starting July 1, the mileage rate became 58.5 cents per mile. The mileage rate also increased for using your car for medical care, moving, and charitable activities.

6. College Expenses

If you or your dependents are in the first two year of college, you may qualify for the Hope credit and receive a maximum of $1,800. Students beyond the first two years of college are eligible for a Lifetime Learning credit of $2,000. However, there are income limitations for both the Hope credit and the Lifetime Learning credit.

If you are planning to invest in a future college program, education savings to a state-sponsored “Section 529” college savings plan is a good program because the earnings are not taxable and your contributions can be deducted on most state tax returns.

7. Home Sales

Gains on home sales up to $250,000 for single taxpayers and $500,000 for married taxpayers are still tax-free. However, Congress changed the tax rules recently on gains of vacation homes and second homes, so gains on those sales now have bigger tax implications.