If you’re self-employed, December 31 is the last day to sign the paperwork for creating a qualified retirement plan for this year. If you have no employees, consider a solo 401(k) to maximize your deductible contributions. You don’t have to put money in now; you have until the extended due date of your return to complete your contributions.
When you get near the end of the year, decide whether this has been a good year. If so, consider buying any needed equipment now so it can be placed in service by December 31. This will enable you to write off the cost, rather than depreciating it over a number of years. Also, stock up on supplies you’ll need for the coming year and pay any outstanding bills to boost deductions for this year.
Many trade and professional associations operate on a calendar year basis so that dues run from January 1. Check whether to join or renew your membership. Dues paid to trade or professional associations, business leagues, chambers of commerce, civic or public service organizations, and real estate boards are tax deductible. But don’t pay for more than a year at a time; dues covering membership beyond 12 months is not currently deductible this year (you’ll have to wait until next year to deduct them).
You have until April 15 to make deductible contributions to an IRA and/or health savings account (HSA) for last year if you are eligible to do so. Action now can cut your tax liability for last year. Caution: Even if you obtain a filing extension for last year’s return, you do not get any additional time to put money into an IRA or HSA.
Sign up to use the Electronic Federal Tax Payment System (eftps.gov), which allows you to tell your bank when and how much to transfer to the government. Schedule your tax payments at your convenience
This can be an expensive move. While the IRS doesn’t charge you for doing this, the card processor does. At nearly 2.5% of the tax charged, this is a costly way to earn frequent flyer miles. Best strategy: If the cash crunch is temporary, ask the IRS for a short-term installment payment plan to pay your tax bill.
Borrow from your 401(k) account for any reason. The loan is easy to arrange and interest on repayment is lower than interest on commercial loans. You can borrow up to 50% of your account balance or $50,000, whichever is less. Talk with the plan administrator for details.
Many localities offer rebates or reductions to homeowners, which reduce the amount of property taxes owed. Some breaks are limited to seniors, veterans, and other special status; some are open to all homeowners. These breaks are not automatic
You decide. The tax law limits a deduction for business gifts to $25 per person per year. But in some cases, you can opt to treat a gift as an entertainment expense
Tools of the trade don’t always come with the job. Sometimes it’s up to you to provide them. When you do, the tax law lets you write off their cost under certain conditions.
The cost of work tools is deductible. The cost is treated as a miscellaneous itemized deduction. Miscellaneous itemized expenses are deductible only to the extent they exceed 2 percent of adjusted gross income (the 2 percent of AGI floor).
There is no dollar limit on the amount you can deduct for work tools. The question you must decide is when to claim the write-offs: the year of the purchase or over a set number of years based on the recovery period of the tools. The answer depends on the useful life of the tools. If a tool has a useful life of no more than one year, you can simply deduct its cost in full in the year of purchase. But if it has a longer useful life, you must depreciate its cost or elect first-year expensing.
The U.S. Department of Labor, Bureau of Labor Statistics, says that between September 2007 and September 2008 about 61.8 million Americans did some volunteer work, and some organizations suggest the number is even higher. While individuals bear the burden of the time and effort they put in, the government helps defray any actual out-of-pocket costs through a deduction that can be claimed if certain conditions are met.
If you incur out-of-pocket expenses in serving your favorite charity, you can deduct these costs as part of your itemized deduction for charitable donations.
If you use your vehicle for charitable purposes, including attending meetings of organizations you serve, you can deduct your actual vehicle expenses for gas and oil or mileage at the rate of 14 cents per mile (Congress is considering an increase in this rate). Whichever method you select, you can also write off parking and tolls.
One way in which states raise revenues is through the fees they charge for certain activities, including registering cars and other vehicles. The cost of registration, however, may be deductible under certain conditions.
The state registration fees you pay for your vehicle may be deductible. If your car is used only for personal purposes, you can deduct auto registration fees based on the value of the car as a state personal property tax if certain conditions are met. You must itemize your deductions to be able to deduct this expense.
Clothing that no longer fits, appliances and sporting equipment that are no longer used, and cars being replaced may be of great benefit to someone else. The tax law rewards donations of these items to charities that can put them to continued good use by permitting a tax deduction if certain conditions are met.
Your old clothing, linens, toys, cars, and other items can be of benefit to others. Consider donating them to charity and taking a tax deduction for your efforts. A deduction of these items generally is subject to the 50 percent of adjusted gross income limit. This means that donations of these items are included along with your cash contributions to determine your annual limit.
The tax law allows you to claim a limited deduction when you pay for higher education. The deduction applies whether you pay out-of-pocket from savings or borrow the money. You may claim the deduction each year you qualify for it. The deduction expires at the end of 2009, unless Congress extends it.
If you pay tuition and fees for higher education for you, your spouse, or a dependent, you may be able to deduct up to $4,000 in 2009 as an adjustment to gross income, even if you don’t itemize your other deductions.
Who hasn’t bought a ticket to a fund-raising event or activity, such as a raffle dinner dance, to benefit a charity? Just because the check is written out to a charity doesn’t automatically entitle taxpayers to a deduction. Special rules govern the extent, if any, to which the cost of fund-raising tickets may be deductible.
You can deduct the purchase price for raffle tickets and charity-sponsored events in excess of the regular admission price or other benefit you receive.
You pay $100 for a ticket to an evening sponsored by your favorite charity that includes dinner and a show. The value of the dinner and show (what you would have paid regularly) is $75. You can deduct $25 (the excess cost over the regular price).
Investors need to stay up to date with developments in the economy and the stock market in order to make sound investment decisions. There are many ways to stay current-investment newsletters, magazines, and Web-based services. The cost of keeping on top of financial developments may be tax deductible.
If you subscribe to investment newspapers, newsletters, or online services, you can deduct the expenses as a miscellaneous itemized deduction. The deduction for investment expenses is subject to the 2 percent of AGI floor.
When you are repaying student loans, you may be able to deduct up to $2,500 of interest annually. The deduction is an adjustment to gross income so you can claim it even if you do not itemize your other deductions and simply use the standard deduction.
The ability to deduct student loan interest depends on your modified adjusted gross income (MAGI). If your MAGI is too high, you cannot claim this benefit.
Not every bureaucrat is a regular employee on the government’s payroll. Some government employees are paid under a contract arrangement. Those who are can write off their related employee expenses in a special way.
If you are an employee of a state or local government and are paid in whole or in part on a fee basis, you can deduct the businesses expenses related to these services as an adjustment to gross income rather than as a miscellaneous itemized deduction.
Savings incentive match plans for employees, or SIMPLEs, are a type of retirement plan that allows businesses to share the cost of funding retirement savings. The company sets up the plan and employees are given the option of contributing within set limits a portion of their salaries to the plan. The company must make certain contributions according to a formula fixed by the tax law. The reason this type of retirement plan is SIMPLE lies in the ease of setting it up and administering it.
If you are self-employed or a shareholder in a corporation, the business can set up a SIMPLE plan that allows you (and your employees) to make elective deferrals (salary reduction contributions) to the plan. Such amounts are excluded from your income. As an employer, you must contribute a set amount for each plan participant; you deduct your employer contribution as a business expense.
Whether you are the owner of the business or merely a rank-and-file employee, you can make elective deferral contributions to the plan. Like 401(k) plans discussed earlier, the portion of your compensation that you treat as your elective deferral is not included in your income for the year. (Limits on elective deferrals and required employer contributions are explained next under “Conditions.”)
Earnings on contributions build up on a tax-deferred basis.
A SIMPLE can be set up as either a SIMPLE-IRA or a SIMPLE-401(k) plan. For purposes of the following discussion, only the SIMPLE-IRA, the more popular type, is examined.
In 1962, self-employed individuals for the first time were given the opportunity to set up tax-qualified retirement plans similar to those available to corporations. Initially referred to as HR 10 plans (after the number of the tax bill creating them) or Keogh plans (after the senator sponsoring the bill), these plans have evolved over the years into the same retirement savings plans as are open to corporations. The tax law today calls them self-employed retirement plans.
If you are a sole proprietor or independent contractor and have a profitable year, you can contribute to a qualified retirement plan. There are two main types of plans:
You claim a deduction for your contribution. For a defined contribution plan in 2009, you can deduct 25 percent of compensation or $49,000, whichever is less. However, for self-employed individuals, net earnings from self-employment (the figure on which contributions are based) must be reduced by the contribution itself, so that the effective contribution rate is only 20 percent (not 25 percent). Also, you must reduce your net earnings from self-employment by one-half of your self-employment taxes.
Based on an IRS table, an amount that reduces a business deduction taken for payments on an auto leased for a minimum of 30 days.
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