As you get ready to file your 2008 tax return, take a quick look at the list that follows. It’s a summary of little-known tax strategies that may save you money when you file your tax return. It pays to take a look. You may wind up owing Uncle Sam less than you thought, or get a bigger refund than you expected, even if only one of these strategies applies to you.
1. BACK OUT OF AN IRA CONVERSION
If you converted a traditional IRA into a Roth IRA in 2008, you knew you’d have to report the taxable part of the traditional- IRA withdrawal on your 2008 return. But you may not have planned on a year-end surge in your income (for example, from a bonus or stock market gains). That extra income propelled you into a higher tax bracket, or will rob you of tax breaks (such as the education credit) that phase out at higher levels of adjusted gross income (AGI).
You can’t back out of your bonus or stock market gains (nor would you want to!), but you can back out of that taxable Roth IRA conversion. Through a mechanism known as “recharacterization,” you can undo the conversion and turn the Roth IRA back into a traditional IRA. Net result:
Without the taxable income from the conversion, you may avoid being taxed in a higher bracket and/or may keep your AGI below the point where you would lose tax breaks.
2. TURN A NONDEDUCTIBLE ROTH IRA CONTRIBUTION INTO A DEDUCTIBLE IRA CONTRIBUTION
Did you make a Roth IRA contribution in 2008? That may help you years down the road when you take tax-free payouts from the account (if you’re eligible), but the contribution isn’t deductible. If you realize you need the deduction that a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution (again, via the “recharacterization” mechanism). The IRA deduction is yours if neither you nor your spouse is covered by an employerprovided retirement plan. If you or your spouse is covered, the deduction starts to phase out when AGI exceeds certain limits depending on filing status (for example, for 2008 the phaseout for joint filers starts at $85,000 of AGI).
3. MAKE A DEDUCTIBLE IRA CONTRIBUTION, EVEN IF YOU DON’T WORK
As a general rule, you can’t make a deductible IRA contribution unless you have wages or other earned income.
However, an exception applies if your spouse is the breadwinner while you manage the home front. For 2008, you can make a deductible IRA contribution of up to $4,000 ($5,000 if you are 50 or over) even if you have no earned income. What’s more, even if your spouse is covered by an employer-provided retirement plan you can still make a fully deductible IRA contribution as long as your joint AGI as specially computed doesn’t exceed $159,000. To be deductible for the 2008 tax year, the IRA contribution must be made no later than your tax return due date.
4. CLAIM A MOVING EXPENSE DEDUCTION BECAUSE OF YOUR SPOUSE’S JOB
Job-related moving expenses are abovethe- line deductions (the cost of moving household goods and personal effects plus transportation and lodging en-route), which can be claimed even by non-itemizers. This writeoff generally is available only if
(1) you start a new job or business at the new location (or are transferred by your employer), and
(2) the new job location is at least 50 miles farther from your old home than your old job was from your old home. If your spouse is able to claim the deduction, you can, too, regardless of whose job-related needs drove the move.
5. IT MAY PAY FOR YOU NOT TO CLAIM A DEPENDENCY DEDUCTION FOR A CHILD IN COLLEGE
This can work to your family’s benefit if you pay college tuition for your child, your income is too high for you to claim education credits, and your child has enough taxable income to make use of most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return (even though you paid the education expenses). The tax-cutting value of the education credits that the child can claim may be greater than the value to you of the dependency exemption for the child. Note, however, that the child can’t claim a personal exemption for himself or herself if you are eligible to, but don’t, claim a dependency exemption for the child.
6 . HOME IMPROVEMENTS MAY BE MEDICAL EXPENSE DEDUCTIONS
Home improvements generally aren’t deductible. But a medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer. The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in value of the property. For example, if a qualifying improvement costing $5,000 increases the value of your home by $2,000, the medical expense is $3,000. Note, however, that medical expenses can be claimed on Schedule A, Form 1040 only to the extent they exceed 7.5% of your AGI.
7. EMPLOYEE PAY CAN HELP YOU WRITE OFF BUSINESS EQUIPMENT
A tax break for small businesses allows you annually to expense—that is, to currently deduct—the cost of machinery and equipment up to a certain amount ($250,000 for 2008). Assets that aren’t expensed can only be written off over a period of years (usually five or seven) via depreciation deductions. However, among other conditions, the maximum annual expensing amount is limited to your taxable income from any active trade or business for the year in which you buy the equipment and place it in service. So, if there’s no money coming in during your startup year, there’s no expensing for that year.
Fortunately, your salary as an employee counts as taxable income for expensing purposes. Therefore, if you start up a sideline business as a sole proprietorship and buy computers, printers, scanners, etc., you can write off their cost (up to the annual dollar limit—$250,000 for the 2008 tax year) even if there’s no business income yet, as long as your salary in that year at least equals what you spent on the equipment. The expensing deduction can offset your other income.
8. MAXIMIZE DEDUCTIONS FOR AUTOMOBILES USED IN BUSINESS
If, in 2008, you purchased and placed in service an automobile used in your business, you have two choices on how to deduct expenses related to the vehicle:
- You can use a standard mileage rate (for 2008, 50.5 cents for each business mile driven Jan. 1—June 30 and 58.5 cents for each business mile driven July 1—Dec. 31), or
- You can deduct actual expenses, including depreciation.
The standard mileage deduction is relatively easy to compute. Simply multiply the number of miles the vehicle was driven for business by 50.5 cents (for miles driven during the first half of 2008) or 58.5 cents (for miles driven during the last half of 2008).#Determining actual expenses requires more work. All of the expenses for the vehicle, for example, insurance, gas, repairs, garage rent, etc., must be added up. In addition, a depreciation deduction is allowable under the actual expense method (the standard mileage rate has an amount for depreciation built into it).
For a vehicle purchased and placed in service in 2008 and used more than 50% for business, the depreciation deduction for 2008 is 20% of the car’s cost, subject to a maximum deduction of $2,960 (under the so-called “luxury auto rules”). If the vehicle is used less than 100% for business, the portion of the expenses attributable to nonbusiness use is not deductible.
THE BOTTOM LINE
In today’s economy, we are all working hard to earn what we get – and just as hard to keep what we earn. Now more than ever, spending a little extra time to see if you can qualify for additional tax savings makes a lot of sense. If you think one of the strategies discussed in this Bulletin might work for you, mention it to your CPA. And, as always, feel free to come to your AKM CPA with any questions or concerns.