5. Monitor retirement distributions. Once owners of traditional IRAs and other tax-deferred retirement accounts turn age 70½, they must start taking required minimum distributions, or RMDs, or face steep tax penalties. IRA owners who reached the mandatory withdrawal age in 2008 have the option to delay their first RMD until April 1, 2009. The amount of the distribution, however, still must be based on the account's value as of Dec. 31, 2007. That could be very costly for account holders who are forced to sell assets that lost much of their value in 2008's market turmoil. There is support on Capitol Hill for temporarily suspending RMDs. If you are required to take a distribution and can delay the payout, do so as long possible to see if lawmakers provide some relief in this area.
6. Take the first-time homebuyer's credit. Unless Congress extends the time frame for this tax break, you only have the first six months of 2009 to qualify for the first-time homebuyer's credit. This actually is a $7,500 loan that must be paid back over 15 years via your future tax filings, and applies only to first homes bought between April 9, 2008, and July 1, 2009. Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. And although it technically applies to first-time buyers, the IRS says you qualify if you haven't owned a primary residence during the three years prior to your home purchase.
7. Cash in on no capital gains. In 2008 a great tax break took effect for investors in the 10 percent and 15 percent income tax brackets. Those folks could sell their assets and owe no capital gains tax. This tax break also applies to qualified dividends. This good investment-sale news continues in 2009 and, for planning purposes, 2010. For 2009, the 15 percent tax bracket for singles tops out at $33,950; it's up to $67,900 for married couples filing jointly. If you can realistically keep your income under the limit, then you can cash in assets without worrying about how much of your profits will end up at the IRS.
8. Watch your tax bracket. A huge deficit plus a Democratic House, Senate and president mean higher taxes, right? Not necessarily, at least not in 2009. A stumbling economy has put the brakes on President-elect Barack Obama's campaign pledge to raise tax rates for higher-income earners. The more likely scenario now is that existing tax cuts will continue through their scheduled sunset date of Dec. 31, 2010.
But don't expect lawmakers to sit still. Since most tax rates will return to higher levels on Jan. 1, 2011, look for Congress to start exploring ways to deal with the coming mass tax increases. Keep a closer-than-usual eye on Capitol Hill so that if changes are made, you'll be prepared to take the appropriate steps to minimize any potential tax costs.
9. Avoid alternative minimum tax. Admittedly, avoiding the alternative minimum tax is easier said than done, especially when Washington insists on annual "patches" to this parallel tax system rather than a long-term fix. Each year, the alternative minimum tax, or AMT, threatens to ensnare millions of middle-class taxpayers, primarily because when it was created it didn't include an annual inflation adjustment. For 2008, the exemption amounts to correct this oversight and protect filers from the AMT were increased to $46,200 for single taxpayers and $69,950 for joint filers.
Judging from past performance, Congress likely will bump those earnings amounts up a bit for 2009. However, there is hope that 2009 will be the year that lawmakers finally hammer out a permanent AMT solution. House Ways and Means Chairman Charles Rangel, D-N.Y., previously sponsored a bill he described as the "mother of all tax reforms" that included repeal of the AMT. Rangel has promised to reintroduce the measure in the upcoming 111th Congress.