If you had a crystal ball, you’d know the answers to these questions and be better able to plan for investing in 2009:
* Will the economic stimulus raise or lower my federal taxes?
* Will I be able to keep my job?
* Will my income go up or down?
Sadly, there’s no crystal ball. What you do know is that the date for filing income tax is fast approaching, most returns on investments are taxable and your investments probably took a beating in 2008. Where do you go from here?
A little good news
Probably the best word to use to describe 2008 for investors is horrible. If there’s any good news in the financial mess for investors, it’s that investment losses lead to certain tax benefits. You can use losses to offset gains and some of your ordinary income. Those investors who took a look at their portfolios last year and decided to sell some of their investments at a loss should realize tax savings.
Beneficial changes in tax law
Changes in federal tax law also may be of help to you as you prepare your 2008 income tax return and start making plans to invest in 2009.
Zero capital gains tax. This year, taxpayers in the 10% and 15% income tax brackets will pay 0% in capital gains taxes on the sale of appreciated investments held for one year or longer. (The 15% maximum tax rate for taxpayers in higher brackets stays the same.) Prior to 2008, these gains were taxed at a maximum rate of 5%.
Increased Roth IRA contribution limits. In 2007 you could deposit up to $4,000 tax free into a Roth IRA. Now you can deposit up to $5,000 tax free. Taxpayers over 50 years of age can deposit up to $6,000 this year.
Understanding tax-efficient investments
Investments are taxed at differing rates and at differing times. Some are taxed at high rates; others at low rates or not at all. Some allow you to defer taxes – often for many years. This is why it’s wise to position your investments so that you minimize taxes and maximize tax efficiency. Generally speaking, you should keep low-tax investments in current-tax accounts and high-tax investments in deferred-tax accounts:
* Bond funds in deferred-tax accounts.
* Stocks held for less than one year in deferred-tax accounts.
* Stocks held for more than one year in after-tax accounts.
* Tax-free municipal bond funds in after-tax accounts.
Other tax breaks
Here are some other tax breaks, either extended or added by the U.S. Congress in 2008, that may allow you to set aside funds for investment this year:
* First-time home buyers can get a federal tax credit of $7,500 or 10% of the purchase price of the home, whichever is smaller. Income limits apply. This is a loan and must be paid back.
* Taxpayers who itemize deductions can deduct state and local sales taxes instead of state and local income taxes. This works to your benefit if you’ve made a really big purchase or if you live in a state that does not have income tax.
* Taxpayers who take the standard deduction and pay property taxes can take a new, additional deduction for property taxes of up to $500 for those filing singly and $1,000 for those filing jointly.
List of online tax preparation companies
The Internet has made life more convenient in many ways. Online preparation of both federal and state income tax returns is one of those conveniences. Several companies offering this service are listed below.
H&R Block
www.HRBlock.com
pay taxes on investmentsezTaxReturn
www.ezTaxReturn.com
Taxxprep
www.taxxprep.com
Express Tax Refund
www.ExpressTaxRefund.com
Tax Act
www.FreeFederalReturn.com
Bookkeeping and Management Systems, Inc
www.Bookkeeper.com
Pro-Tax
www.PROTAX.com
Rapid Tax
www.RapidTax.com
Tax Brain
www.taxbrain.com
Tax Slayer
www.taxslayer.com
Complete Tax
www.completetax.com
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