Your 2008 tax return can provide guidance for 2009
Rather than being merely an unpleasant memory, your 2008 tax return should be the template for your 2009 financial game plan.
The return’s vital information about your situation can tell you line by line what you’ve done right and wrong. In one of the most trying economic periods in our nation’s history, repeating mistakes is asking for trouble.
"The purpose of looking at your 2008 tax return is to anticipate changes for 2009," said Molly Balunek, certified financial planner and vice president with Spero-Smith Investment Advisers in Beachwood, Ohio.
"For example, it is important that you ask yourself how your sources of income may change from 2008 to 2009 so that you can plan accordingly."
Here are some things to keep in mind.
— The drop in investment values should alter strategies: "In every economic season there is an opportunity, and the biggest one with these market declines is estate planning in terms of giving gifts," said Mackey McNeill, CPA and president of Mackey Advisors, Cincinnati. "You can transfer $12,000 per person annually free of gift tax, so if stock or real estate assets are severely depressed, you can give them away while they’re ‘on sale’ to your kids or your grandkids."
— It’s time to re-examine the relevance of your current investment mix: "Individuals who are out of work and without income, but who still have a mortgage and property taxes, should not be in tax-free investments," said Joel Isaacson, president of Joel Isaacson & Co. Inc. in New York. "They belong in taxable investments because if, for example, they have $20,000 of mortgage interest and $10,000 in real estate taxes, they can take in $30,000 of income free of tax."
— Declines in investments can be used to your advantage: "This may be a good time to harvest capital losses, since you can deduct up to $3,000 in realized losses against ordinary income and carry forward the remaining portion into future years," said Maureen McGetrick, tax partner with BDO Seidman LLC in New York. "You can also offset a gain."
Many investors aren’t aware they can offset capital gains against losses to the extent that they have them, not just by $3,000, said Mark Balasa, co-president of Balasa Dinverno Foltz LLC wealth management firm in Itasca, Ill.
"If you had portfolio losses carried over from your 2008 taxes, you can use them to offset gains and can still use an additional $3,000 against ordinary income," Balasa said. "So pay close attention to how your 2008 realized losses will be handled in 2009 guaranteed payday loans."
Whether you decide to take some losses also depends on your expectations for the future of tax rates.
McNeill says that if she "was a betting person," she’d bet tax rates are going to be higher in the future.
If you have an asset that has dropped in value, even though you have to pay tax on it, sell it now because this might be the least amount of tax you’re ever going to pay, she said.
— There could be other reasons to sell: With Procter & Gamble based in McNeill’s area, many of its shareholders live nearby. They loaded up their portfolios on Procter shares at low prices and never sold, fearing taxes on gains. Now that those shares are down, they can be sold with less tax consequences and proceeds deployed to other assets, McNeill said. That is an opportunity available to many investors holding too much of one firm’s shares.
In other instances it is better to hang tight, especially if you’re a retiree counting on the market’s reviving eventually.
"When the stock market is down by half, the last thing many people want to do is sell assets, so for 2009 Congress changed the rules for IRA distributions for folks 70