EDITOR’S NOTE: In the final installment of a six-part series dedicated to re-energizing your financial health in the wake of the financial collapse, SmartMoney offers advice on how to use the tax code to your advantage.
Millions of Americans may look back on 2009 as the year they froze like deer in headlights – and made money by standing still. Since the market bottomed out in March, some who sat on their hands have done surprisingly well. As of today, an investor with all her stocks in an S&P 500 index fund would be up a healthy 20 percent for the year – and more than 60 percent since March.
The government, meanwhile, has thrown money at consumers in the form of tax rebates and the Cash for Clunkers program, and beleaguered homeowners in cities like Dallas and Denver have even seen a rebound in real estate prices. Add such unexpected good news to the paralysis that comes with financial uncertainty and it’s clear why many people have stayed on autopilot. Of the 3 million customers with retirement plans at Vanguard, for example, the company says 89 percent made no moves in their portfolios, none at all, in the first nine months of last year.
But as a strategy for the future, sitting still may turn out to be, well, so 2009. Even the most upbeat professionals doubt that a do-nothing approach will produce more miracles for the average investor. Last year’s stock rally was the biggest since the 1930s; you might see Halley’s Comet before you see another year remotely like it.
Indeed, bond guru Bill Gross recently told fund shareholders that the market could look anemic “for the next 10 years and maybe even the next 20.” The housing markets aren’t expected to deliver any windfalls, and taxes seem poised to rise. That means sticking with the old ways won’t help anybody stay ahead of the recovery. And most people know they can’t afford to do nothing: According to a survey by the Employee Benefit Research Institute, only 13 percent of workers are confident they have enough money for a comfortable retirement.
But most people are still wondering where to start. After all, the strategic landscape is both complex and shifting: Do the attractive yields of corporate bonds mean they’re replacing stocks as the anchor of a portfolio? Is it time to move retirement savings to a Roth plan? Does it finally make sense to invest in real estate? Here’s a guide to get you started on refreshing your finances.)
REFRESH YOUR FINANCIAL LIFE: TAXES
For consumers looking to refresh their overall financial strategy, every penny counts. That’s why experts say tax planning is so important – particularly now. The government’s efforts to boost the economy have created what Claudia Hill, editor of the Journal of Tax Practice and Procedure, calls “a bunch of screwy little changes” in the tax code. But some of those changes can put money back in taxpayers’ pockets.
The ballyhooed Cash for Clunkers program may be over, but consumers can still get a break on new vehicles bought last year. The stimulus bill allows a deduction for state and local sales tax on any new car, motorcycle or motor home purchased in 2009 for up to $49,500.
After selling thousands of dollars’ worth of stock during the market surge, retired investor Michael P. Morgan of Fort Myers, Fla., expected to face a hefty capital-gains tax bill. Instead, he’s getting a nice surprise: Most of those gains will be tax-free. That’s due to @a little-known provision of the tax cuts passed in 2003, under which singles making less than $33,950 and couples with income under $67,900 are eligible for a zero-percent rate in 2009 and 2010. (Capital gains count in the income tally, but only gains that come in over the threshold get taxed.)
In Morgan’s case, his wife’s retirement last year ^dramatically @lowered their income, and charitable contributions and other deductions helped the Morgans squeeze under the income limit. “It was incredible,” Morgan says. Other investors may have helped themselves on the tax front by selling stocks at rock-bottom prices early last year, says Adam Spiegel, a Miami-based accountant. Many of them have reaped the $3,000 maximum in capital losses that the Internal Revenue Service allows taxpayers to deduct in a given year. Investors can use those losses to offset gains they snared in the subsequent rally, helping them keep their tax bill's lower.
For the millions of Americans who spent part or all of 2009 involuntarily unemployed, the tax code offers at least a smidgen of solace. Under the stimulus bill, the first $2,400 in unemployment benefits earned in 2009 is exempt from federal taxes. And job-search expenses and many of the costs of being self-employed can be tax deductible, provided they amount to more than 2 percent of income.
ALTERNATIVE MINIMUM TAX
The AMT was designed decades ago to make sure the very rich didn’t dodge taxes by piling up deductions. But after years of inflation, it now hits more than 4 million Americans, many of whom don’t consider themselves rich. Congress’ latest patch increases the 2009 AMT exemption to $46,700 for singles and $70,950 for married couples. A complex range of factors determines who gets whacked; most tax-preparation software can help taxpayers figure out if they’re in the crosshairs.
2009 Copyright The New York Times Syndicate