Tax Time Next Year: Your 2008 Return Could Save You Money in 2009

Perhaps you were happy to stuff your tax return into your file cabinet and put the whole business behind you, but this is actually a great time to have one last look at those forms. Your tax return contains details about your financial life that you can use to reduce the amount you’ll have to pay next year—but you have to know where to look.

“Your return is like your financial statement,” says Tom Ochsenschlager, a tax expert and spokesman for the American Institute of Certified Public Accountants. “When you look at your return, you shouldn’t just think about taxes, but about financial planning.”

If you did your taxes yourself, you might want to print them out and take them to a professional tax preparer for review. If you paid someone to prepare them, study them yourself, with an eye toward these key spots for saving opportunities.

The basics

• Check the bottom line first. Did you owe so much that you had to pay a penalty? Or did you get a large refund, in effect giving Uncle Sam an interest-free loan? Either way, that’s a mistake, so try to adjust your withholding and estimated tax payments so you come closer in 2009. And be careful: The IRS in February reduced its recommendations for withholding amounts, as part of the stimulus bill. (You can find the new recommendations in the IRS Publication 15-T.) If you’re retired and receiving a pension, the withholding tables may be too low for you.

• Figure out your federal tax bracket so that you can make strategic decisions in 2009. A quick way to estimate this is to divide your adjusted gross income by the amount of taxes you paid. Online tables and calculators can help.

Income strategies

• Look at where your income is coming from. Are you declaring a lot of dividends and interest? Are the dividends mostly “qualified,” meaning you’ll pay no more than 15 percent federal income taxes on them? Or are they “unqualified” and subject to your personal income tax rate, which can be much higher? Unqualified dividends include those from real estate investment trusts and bond mutual funds. Ochsenschlager suggests keeping funds that produce more taxable income inside your tax-favored retirement plan, while holding stocks and mutual funds that produce qualified dividends in your regular taxable investment accounts. And consider investing in tax-free municipal bonds instead of taxable bonds if your tax bracket is 28 percent or higher.

• Did you take a mandatory distribution from an individual retirement account? There’s a reprieve from this requirement, just for 2009. You may want to skip your payout this year, suggests Mark Nash, a partner with PricewaterhouseCoopers Private Company Services.

• Are you making so much (more than $34,000; $44,000 for joint filers) that 85 percent of your Social Security benefits are taxable? There really isn’t too much you can do about this, Nash says, except this: If you’re close to those cutoff points and you’re living off of taxable withdrawals from tax-deferred retirement accounts, you can make fewer withdrawals from those accounts, and instead draw more of your living expenses from tax-free Roth accounts or taxable investments.

• Do you have losses to use up? Investors did poorly across the board in 2008, and if you sold any losing stocks or mutual funds then, you may have a “net loss carryforward” on your taxes. That means you can use that loss in 2009 to offset gains and as much as $3,000 of your ordinary income. Check the size of your net loss carryforward and sell some of your winning investments to lock in those gains without having to worry about paying taxes on them, says Ochsenschlager.

• Has your situation changed dramatically since the end of 2008? If you lost your job and can’t figure out whether or how much to pay in estimated taxes, remember these painful facts: Both severance pay and unemployment benefits are taxable. Taxes are usually withheld from severance but not from unemployment benefits. If you land a paying job before your severance runs out, you could end up in a higher tax bracket than usual.

Don’t lose deductions

• Look at your Schedule A, if you have one. Perhaps you didn’t even have enough deductible expenses to justify itemizing them, and you simply took the standard deduction. Use the forms—and the IRS guidelines available on the agency’s website—to make sure you’re thinking of every possible deduction that could be coming to you.

• Set up your system now. If you missed taking deductions because you lost track of them, set up a fail-safe filing system now, before the same thing happens again in 2009. Try using an accordion folder for receipts; label each section with a category of deductible expenses, and then toss every receipt into its category all year long. You can also keep a running tally by entering and categorizing your expenses in a program like Quicken or Microsoft Money. Even keeping a running list with a pen and paper will work.

• Make the most of your charitable gifts. If you know you’re giving away a lot of household goods and clothing to charity, but not claiming it on your return, you can capture those deductions with better records. Keep a running tally of everything you give away. Make sure you get receipts for all of it.

• Do you miss out on medical deductions? Once your medical expenses exceed 7.5 percent of your adjusted gross income, you can deduct everything from aspirin to x-rays—if you remember to keep track of such expenses all year long. Did you know assisted living expenses are often deductible? Check with your (or your parents’) assisted living facility and your tax preparer to get the guidelines. You may have to push to get the information you need—assisted living facilities are frequently reluctant to provide details.

• Still leaving money on the table? Consider an every-other-year strategy for managing your money and saving on taxes. Practitioners like Nash often tell their clients to “bunch” their deductions every other year. For example, if you paid your 2008 property taxes in December, you might be able to hold off and pay this year’s in January 2010, and then your 2010 property taxes in December 2010.

• Similarly, put off this year's discretionary medical and miscellaneous expenses until next year. What does this accomplish? If you’re close to taking the standard deduction instead of itemizing, it can allow you to maximize the value of the deductions by itemizing every other year. And if you’re subject to the alternative minimum tax, it can segregate your AMT hit into every other year, instead of every year.

If you have plenty of deductions anyway, and don’t get hurt by the AMT, don’t do the every-other-year strategy. Just keep those careful records and cram every possible deduction into 2009. Next year at this time, you may even enjoy looking over your forms.

Linda Stern is a freelance journalist who writes about taxes.