Take advantage of 2009 tax breaks

It's always a challenge to get revved up about tax planning, but in this year of financial ups and downs, it might be worth your while. Uncle Sam has a provided a number of breaks to aid savaged investors, stalwart consumers, worried retirees, and working people.

Check your withholding

The American Recovery and Reinvestment Act of 2009 instructed employers to withhold 6.2 percent less in federal income tax for most workers, up to $400 per individual. But that change—a tax credit called the Making Work Pay Credit—might leave some taxpayers, including two-income married couples, with too little withheld. Consult an accountant or check the IRS's withholding calculator on its Web site (www.irs.gov) for an estimate of your proper withholding. "Even a rough calculation will probably help most people," says Stan Pollock, a CPA in Berkeley, Calif.

Take advantage of loss carryovers

You can use capital losses from the sale of investments to offset capital gains and up to $3,000 in ordinary income each year. Additional losses can be carried into later years until the losses are used up. (These rules don't apply to losses in tax-deferred retirement accounts.) If you're in the 28 percent tax bracket, a $3,000 loss reduces your federal tax bill by $840. Given the stock-market meltdown in 2008 and early 2009, many investors are likely to utilize this rule for several years. "I won't be paying capital gains for a long time," says Tom Ochsenschlager, a CPA and vice president of taxation for the American Institute of Certified Public Accountants.

Buy a new car, get a tax break

If you're hankering for a new vehicle, buy one before year-end. You might be able to deduct state and local sales and excise taxes paid on a purchase of up to $49,500 for a new car, light truck, motor home, or motorcycle. The deduction is available to both itemizers and non-itemizers, and to people subject to the Alternative Minimum Tax (AMT), but it phases out as income rises. And if you bought a new car through the cash-for-clunkers program, the voucher of up to $4,500 you received is not subject to tax.

Hold off on 401(k) distribution

Retirees over age 70½ did not have to take a minimum distribution from their IRAs, 401(k)s, and other qualified retirement plans this year. If you can afford to forgo that withdrawal through the end of the year, you'll save on income taxes in April.

Perennial tax moves

Here are some tax-cutting strategies that make sense every year.

Time your mutual-fund trades

If you're selling a fund for a long-term gain, do so before its ex-dividend date, the day on which the capital-gains distribution is deducted from the fund's share price. If you sell your shares after the distribution date, you might get a lower price for your shares and some of the distribution you receive could be a short-term capital gain, taxed at higher rates. By selling before, most or all of your profit will be a favorably taxed long-term capital gain. Conversely, if you're buying fund shares, wait until after the ex-dividend date. Buy too soon and you'll get some of your own money back—and you'll owe tax on it.

Maximize deductions

If you're itemizing deductions and don't anticipate falling under the AMT, you can save by accelerating deductions into this year and deferring income until 2010. For instance, if you can, prepay deductible state or local property taxes. You also can take miscellaneous itemized deductions once they exceed 2 percent of your adjusted gross income (AGI). So before the year is over, pay your 2010 professional dues and buy tools and supplies for your home office. See IRS Publication 529, Miscellaneous Deductions, for more ideas.

Bunch medical expenses

They are deductible to the extent that they exceed 7.5 percent of AGI. To cross that threshold, try prepaying for medical services that aren't covered by your insurance, such as hearing aids or dental work. You also can deduct medical expenses for a qualifying dependent adult for whom you pay more than half of annual expenses.

Mind the AMT

If you're subject to it, you might want to take the opposite approach, pushing deductions into the next year to avoid triggering the AMT for 2009. This year, singles and heads of household with AGI above $46,700 ($70,950 for married couples filing jointly) might be victims of the tax. Talk to a tax professional or use the AMT Assistant at the IRS Web site to determine if you're affected.