End of Year Tax Planning - Deductions

For me, October is a good time to review my 2009 financial status for tax return filing purposes. It gives me a few months to make any changes that can lower my taxes. With the exception of IRAs, there is little that can be done to change one's tax situation after the calendar year is over. The first area I review are the deductions I can take on Schedule A.

Here are the specific categories I check for itemized deductions:

Medical - Medical expenses that exceed 7.5% of adjusted gross income are deductible. Before retiring, our medical expenses were not close to the limit. However, now that I pay for retiree health insurance with post tax dollars, I can count my premiums in this deduction. If we're close to the 7.5% limit, we can make some more medical related purchases (e.g. over the counter medicines) and become eligible for the deduction.

Taxes - Our deductions include property taxes, and state/local income taxes. Since property taxes are paid 6 months in arrears for our county, we can choose to pay our 2009 property taxes early in December, 2009. This would increase our itemized deductions.

For state taxes, we are currently making quarterly estimated tax payments. The final payment for 2009 is due on January 15, 2010. By making the final payment in December, 2009, I can take the deduction this year.

A major caution is the Alternative Minimum Tax (AMT) sometimes negates the deduction benefit of accelerating tax payments into the earlier tax year.

Charitable Contributions - I always check if we have any goods that can be given to Goodwill or Vietnam Veterans. In addition, we decide whether to make some of our 2010 contribution pledges in 2009.

Miscellaneous Deductions - These deductions need to exceed 2% of AGI before they can be taken. Our primary deduction for this category is investment expense, which includes the managed account fees we pay our financial advisor.

Other expenses, such as union dues, unreimbursed employee expenses, and tax preparation costs, can also be deducted in this section.

With the exception of accelerating property taxes and charitable contributions, most of the deductions changes are usually less than $100. However, since every additional $100 deduction is typically results in a $15 to $25 additional refund, I think it's worth a couple hours of planning to maximize deductions and increase our tax refund.

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This is not financial or tax advice. Please consult a professional advisor.

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