Tax strategies for a recession

March 01, 2009

The following tax strategies to consider during a recession were provided by Cornerstone Wealth Management Group in Hagerstown:

Use tax loss harvesting. While you can reduce your ordinary taxable income by up to $3,000 in net capital losses each year, you can carry over losses that exceed the $3,000 limit to a future year. That strategy could be especially beneficial if the capital gains rate increases in the future.

Convert to a Roth IRA. If converting your traditional IRA to a Roth IRA would fit into your diversified portfolio, but you've always balked at paying the taxes due upon conversion, it might be a good time to convert now. Why? You'll still pay income taxes on the amount being converted, but lower account values now mean your tax liability on a conversion will be lower. Although taxpayers with modified adjusted gross income of more than $100,000 are ineligible to do a conversion in 2009, keep in mind this limit will be lifted for conversions beginning in 2010.


Take advantage of first-time homebuyer credits. If you're in the market for your first home, falling real estate prices and low interest rates are extremely good news. Additionally, there's a tax credit of up to $7,500 for qualified first-time homebuyers who purchased their house after April 8, 2008, but before July 1, 2009.

Although you have to repay the amount of the credit over the next 15 years, you receive a break on your current-year taxes during a time when your budget might be especially tight.

Use dollar-cost average. Dollar-cost averaging involves investing a fixed dollar amount at predetermined intervals similar to a 401(k) plan. These set contributions buy fewer shares when the market is up and more when the market is down. Continue to make broad-based contributions on a regular basis to your 401(k) or IRA to benefit from tax-deferred growth.

Give your nest egg a break. On Dec. 11, 2008, Congress passed the Worker, Retiree and Employer Recovery Act of 2008 (H.R. 7327). One of the most significant provisions in the legislation is the temporary suspension of required minimum distributions (RMDs) for 2009 from IRAs and employer plans.

Donate funds from an appreciated stock. If you have appreciated stock for more than one year, donating it instead of writing a regular check provides a bonus. You might avoid paying tax on the appreciation, but will be able to deduct the full value of the stock.

Recalculate your rebate. If you received less than the maximum for your Economic Stimulus Act rebate check, you could have a second chance. According to the tax bill, individuals are due a check for the better of the amount due based on their 2007 and 2008 tax returns. If your income was deemed "too high," strategies like deferring income to 2009 or postponing IRA withdrawals could qualify you for a rebate.

Use education tax credits when possible. If your child is college bound, tax credits provide more bonuses than deductions. The Hope Scholarship Credit gives parents a tax credit for 100 percent of the first $1,200 and 50 percent of the next $1,200 of their child's tuition and fees. The Lifetime Learning Credit is a tax credit for 20 percent of up to $10,000 in combined tuition and mandatory fees. Also, there is no limit on the number of years this credit may be taken.

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