Frequently overlooked tax strategies

Every year, taxpayers miss opportunities to make tax-smart moves. Here are some actions to take before time runs out.

Make tax-effective charitable donations

There are a variety of charitable-related tax opportunities available:

• Make charitable donations by Dec. 31. Ask for receipts.
• Donate appreciated, long-term securities: Avoid paying federal and state tax on the capital gain and possibly receive an income tax deduction. This will enable you to make a larger gift at a lower cost to you.
• If you're able to give very generously, remember that deductions for charitable donations are limited to 50% of your adjusted gross income.
• Claim volunteer mileage: In 2009, you can claim 14 cents per mile driven to and from meetings and functions related to volunteering for a non-profit organization.
• Document "quid pro quo" gifts in exchange for a donation: If you make a charitable donation and receive goods or services of more than a small amount, you'll need a disclosure statement from the organization estimating the fair market value of the goods or services you receive. The rest of your donation may be tax-deductible.

Get all your educational credits

As with charitable donations, there are many tax-favored educational opportunities for students of all ages, including:

• The American Opportunity Credit (available in 2009 and 2010) modifies and extends the Hope Credit, which can now be claimed for the student's first four years, rather than two.
• The Lifetime Learning Credit, which applies to undergraduate, graduate, vocational and professional courses.
• Coverdell Education Savings Account. Invest up to $2,000 a year and withdraw the money tax-free when used for eligible educational expenses. Note: The Economic Growth and Tax Relief Reconciliation Act of 2001 is scheduled to "sunset" effective December 31, 2010. The sunset will not affect taxation of distributions for higher education expenses. However, after December 31, 2010, the tax treatment of distributions from Coverdell Education Savings Accounts for K-12 expenses is uncertain. In addition, the $2,000 maximum contribution limit may return to $500.
• 529 college savings plan (and state tax benefits in some states): These are similar to Coverdell ESAs, but have no annual contribution limits or income limits (though they may have plan maximums). In addition, you may receive a tax deduction or credit when saving in your own state's plan. If so, look into your state's rules regarding deduction and credit limits and when contributions must be made.

Don't wait to save for retirement

• Contribute to a tax-deductible retirement plan by year-end.
• Contribute to a Roth IRA for your children who have at least a part-time job.
• Anyone with earned income can have a Roth IRA. Why not give your children a head start on a lifetime of tax-free compounding on their retirement savings?
• If you don't meet income eligibility to contribute to a Roth IRA, contribute to a non-deductible IRA during 2009. Then, convert it to a Roth during 2010 when the income limits for Roth conversions are suspended. If you have pre-tax assets in an existing IRA, special tax rules apply to this strategy. Talk to your financial advisor and tax professional.

Use capital losses now and in the future

• Harvest tax losses to offset capital gains. If you own any stocks that have dropped in price, you can sell them by year-end to offset any realized capital gains and avoid or reduce capital gains tax. Any additional capital losses can offset up to $3,000 of ordinary income ($1,500 for married filing separately).
• Capital loss carryforward. You may carry forward unused capital losses to offset capital gains in future years.

Make the most of home-related tax breaks

• Be aware of limits on the exclusion of gain on a home sale. Before this year, taxpayers could exclude up to $250,000 of gain from federal taxation on the sale of principal residences ($500,000 for married taxpayers). In 2009, if the property was used for non-qualified purposes, the tax benefit will be reduced by a ratio reflecting the proportion of non-qualified use ("non-qualified" refers to property that isn't used as the taxpayer's principal residence after 2008).
• Depending on your situation, you may be eligible for a current tax deduction on the points you pay on a mortgage refinance. If not, you may be able to spread out the points deduction over the course of the loan.

Benefit from all gifting opportunities

• Beware of the "kiddie tax" when making gifts to children. It bumps up the child's unearned income beyond a threshold so that it's taxed at your tax bracket, rather than the child's typically lower tax rate.
• Give gifts of tax-free payments for medical or tuition expenses (if paid directly to a medical or educational institution). Payments for medical expenses and tuition are not considered taxable gifts and are not included in annual exclusion limits or in the $1,000,000 lifetime exclusion.

Don't overlook any credits

There are numerous long-standing and new tax credits. Make sure you claim all you can.

• Update W-4 withholding to reflect tax law changes and/or life changes: The Making Work Pay tax credit of $400 ($800 for married couples) is just one reason to review and update your W-4 withholding allowances.
• Child Tax Credit. The American Recovery and Reinvestment Act (ARRA) lowers the threshold for a Child Tax Credit refund to $3,000 from $12,550 (in 2009 before the change).

Don't forget other tax breaks

1. Small business. If you own a small business, make sure you deduct all expenses, including business mileage.
2. Miscellaneous deductions. Be aware of the 2% floor. When itemizing tax deductions, there are some expenses that are subject to a 2% limit. These include unreimbursed employee expenses and tax preparation fees and other expenses.
3. You can deduct certain expenses only when they exceed 2% of your adjusted gross income.

A wide range of tax opportunities exists. Consult your financial advisor and tax professional to make sure you're not missing out on any potential tax savings.