Early tax planning can save you money

Two caveats: Don't sell a mutual fund if you bought it several years ago, because taxes will be assessed on capital gains since the purchase date. Also don't sell if the fund is in a tax-sheltered IRA, since its distributions are not taxable.

Educational credits

Lower-income earners may qualify for HOPE or Lifetime Learning credits. The standard tax credits and deductions for higher education are $4,000 for single filers with AGI less than $65,000, and $130,000 for married couples filing jointly. They gradually phase out for those earning more. The credits apply to both tuition and fees. Consider prepaying college tuitions for the months of January to March 2009 to qualify for a 2008 deduction. Taxpayers can claim education credits whether itemizing or using a standard deduction.

Recovery rebate credit

For those who did not receive stimulus rebate checks – $600 for individuals, $1,200 for couples, and $300 for each eligible child – here's a second chance to qualify. (Single filers with incomes over $75,000 and joint filers making $150,000 or more still aren't eligible.)

Three classes of taxpayers now qualify for "recovery rebate credit" based on their 2008 taxes: (1 if your 2008 AGI falls below the income threshold and your 2007 income disqualified you; (2 if you had a child born in 2008; (3 if you received only a partial rebate in 2007. In the latter case, you may qualify for the remainder of the credit if your 2008 AGI qualifies. Refer to irs.gov for a worksheet.

Disaster relief

If you reside in a federally declared disaster area in 2008 and have had primary-residence damage between May 20 and Aug. 3, you can withdraw, without penalty, money from an IRA, 401(k), 401(b), or other retirement plans. Affected states are Arkansas, Iowa, Kansas, Michigan, Minnesota, Missouri, and Wisconsin. Income reported from those withdrawals can be spread over three years. Replenish your retirement accounts when able.

First-time home buyers

Purchase a house from April 9, 2008 to July 1, 2009 and receive a tax credit equal to the lesser of $7,500 or 10 percent of the purchase price. You must have had no prior ownership of a principal residence in the US for the past three years to be eligible. This credit phases out when income exceeds $75,000 for singles and $150,000 for couples.

Mortgage forgiveness

Beginning in 2008, a surviving, not-remarried spouse may sell his or her principal residence within two years of a partner's death and can exclude $500,000 on the gain of a home sale. Equal benefits are available to a married couple filing jointly.

Taxpayers in 10 to 15 percent brackets

Beginning in 2008, long-term capital gains and qualified dividend income are taxed at 0 percent.

Underpayment penalties

Don't get hit with an underpayment penalty. This penalty does not apply if you have prepaid at least 90 percent of your 2008 tax bill by the end of this year, 100 percent of the tax shown on your 2007 return, or 110 percent if your tax bill in 2007 was more than $150,000.

Check back next week for a discussion of how tax changes may affect your retirement plans and gifting.

• Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

Previous

1 | 2