In today’s tough economy, you’ll want to give as little as possible to the IRS… and get the biggest tax refund possible. Here are tax-saving, refund-boostingstrategies…
NEW LAW DEDUCTIONS
Newly created deduction opportunities for 2008…
Driving deduction. As of July 1, 2008, the IRS increased the cents-per-mile deduction for driving a car for business to 58.5 cents (from 50.5 cents) for the second half of the year. The rate for deducting driving as a medical or moving expense also increased at midyear, to 27 cents from 19 cents.
Business auto. For passenger vehicles bought in 2008, a special deduction called “bonus depreciation” greatly increases the maximum depreciation deduction that can be claimed for a car used for work to $10,960 (up from $2,960) and for a light truck to $11,160 (up from $3,160).
The exact deductible amount depends on the vehicle’s proportion of business use. Example: If a car was used 80% for business, the maximum deduction is $8,768 (80% of $10,960). For details, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.*
Tax credit for first-time home buyers. A tax credit of up to $7,500 is available for first-time home buyers who purchased a primary residence after April 8, 2008. A “first-time” buyer is defined as one who has not owned a residence in the US during the prior three years.
The credit is better than a deduction because it reduces your tax bill dollar-for-dollar. Limit: The credit is phased out as adjusted gross income (AGI) rises from $75,000 to $95,000 on single returns… and $150,000 to $170,000 on joint returns.
Property tax deduction for non-itemizers. Before 2008, property taxes were deductible only by those who itemized their deductions. But many home owners who had paid off their mortgages and so had no mortgage interest to deduct did not have enough deductions to itemize. Thus, they could not deduct the property taxes on their homes.
New for 2008: Individuals who do not itemize can deduct up to $500 of property tax on a single return… $1,000 on a joint return.
Disaster losses. Casualty losses, such as damage from a fire or storm, normally are deductible only to the extent that they exceed 10% of AGI.
New for 2008: Casualties occurring in federally declared disaster areas are deductible without being subject to the 10%-of-AGI rule — increasing the deductible amount. In addition, non-itemizers can claim the deduction as an addition to the standard deduction, eliminating the need to file an itemized tax return.
Sales tax deduction. New law extends into 2008 the federal tax deduction for state sales taxes that can be claimed instead of deducting state income taxes.
The deduction you can take for state sales taxes in 2008 is determined by income level, household size and state — a table appears in the instructions to your tax return. You can add to that figure any sales tax paid on special big-dollar purchases, such as boats and home-building supplies. You then deduct the tax that is larger — income tax or sales tax.
Maximize the tax savings from investment and business losses…
Capital losses. Review your portfolio’s investment results for 2008 to find all your realized losses. These can be written off against capital gains with a net loss of up to $3,000 deductible against your salary and other ordinary income. Any excess loss beyond that amount can be “carried forward” to offset gains or be deducted in 2009 and later years, producing future tax savings.
Worthless securities and bad debts. If you own a security that lost all its value in 2008 or have a debt owed to you that lost all its value, you can claim a capital loss deduction for it.
If the security or bad debt still had some minimal value at the end of 2008 — perhaps because a business that owed you funds was in bankruptcy or other litigation with an uncertain outcome — it won’t yet be deductible. But you still can use it to cut taxes now.
How: Sell the security to your broker for a nominal price, such as $1. That will enable you to deduct your loss on your 2009 return.
RETIREMENT SAVINGS AND CHARITY
Make retirement plan contributions. Even though it is after year-end, you still can make tax-saving contributions to retirement plans for 2008.
IRA contributions can be made until April 15, 2009, and the maximum contribution is increased to $5,000 (from $4,000). For people age 50 and over by the end of 2008, the limit increases to $6,000 (from $5,000).
Earned income is required to contribute to an IRA, but if only one spouse works and has such income, that spouse can make an additional contribution into the nonworking spouse’s IRA.
Out-of-pocket charitable donations. This is one of the most commonly overlooked deductions. You can claim a charity deduction not only for money and items that you donate to a charity but also for expenses that you incur on its behalf.
Examples: Driving your car (14 cents per mile)… taxi fares and travel costs… long-distance phone calls… the cost of printing brochures or other services performed on the charity’s behalf. Go through your records, and don’t overlook any such expenses.
*All IRS publications can be found at www.irs.gov or by calling 800-TAX-FORM.