If the recession has touched your life financially, you might want to do some tax planning to either postpone or accelerate your tax deductions and/or income.   For those anticipating more income this year than next, it may be prudent to accelerate deductions and postpone income.  For those anticipating less income this year than next, consider postponing deductions and accelerating income.  Here are some ways to do that. 

        One example might be to do a conversion of a Traditional IRA to a Roth IRA. This will result in more income in the year completed, but will reduce taxes in future years, particularly after the Roth has been in place five years.  It will be necessary to look at how the additional income will affect your taxes this year before you do complete the process. 

        Another option is to review the assets you hold that have appreciated in value.  As we do anticipate higher capital gain taxes in the future, this may be a good year to sell and take the capital gain in a low income year.  Again, a review of the affect on your overall taxable income is appropriate before selling. 

        From a deductible expense standpoint, consider paying real estate taxes for the year either in December or January depending on which year you anticipate being in a higher tax bracket.  This can result in two real estate tax deductions in one year and none in the other year.  This strategy makes the most sense for those close to a threshold of a higher tax bracket or for those who have itemized deductions that barely exceed the threshold for the standard deduction ($11,400 for married, $5,700 for single).  For those who do not itemize but do pay real estate taxes, this year you can deduct $1,000 ($500 single) for real estate taxes in addition to the standard deduction.  You may have the opportunity to prepay other itemized expenses on your tax return as well.  

        This is a good time of the year to review whether you need to reduce or increase withholding of your taxes.  Most people over withhold and, as a result, they end up making interest free loans to the government.  Many of these same people are borrowing money at excessive interest rates with credit cards.  If you received a substantial refund this past year, file a W-4 form with your employer and increase your number of withholdings.

        Another tax strategy is to look for an opportunity to do income splitting with family dependents.  Many business owners hire their children, transferring income into the child’s lower tax bracket to be used for paying school tuition.  It can also be done for estate tax reasons when assets are substantial.

        This is a great time of year to look at charitable planning.  Presenting gifts of appreciated assets to avoid capital gain taxes may reduce taxes at the end of the year.  The savings and tax reduction is greater with the gifts of appreciated assets.

        First time home buyers or those who have not owned a home in the past three years have an opportunity to receive a substantial tax benefit ($8,000) by purchasing before December 1, 2009.  There has been talk of extending this tax benefit but a final decision has not yet been made.

        Finally, review benefits from your employment to make sure you are taking advantage of all the pre-tax living expenses offered by your employer.  I recently published an article that addresses these opportunities in more detail (click here).

 Robert Ostrander, CFP®

SWS Advisors, Inc.

           The maximum value offered is a $4,500 voucher, which requires mileage improvement of 10 miles per gallon for passenger vehicles, 5 miles per gallon for light-duty trucks, and 2 miles per gallon for large light-duty trucks.  There is also a $3,500 voucher if the mileage improvement is 4 miles per gallon for passenger vehicles, 2 miles per gallon for light duty trucks, 1 mile per gallon for large light duty trucks and any pre-2002 commercial truck.  The $3,500 voucher has less of a margin of value for the consumer.  Knowing this, find the average sale price of your vehicle on nada.com.  Your savings is the difference between the sale price of your car minus the cost of having it sold and the $4500 voucher.  It is estimated a vehicle depreciates about one third of its value as soon as it is driven off the lot. 

           To find the best deal, take the price of the new vehicle and subtract the savings from the Cash for clunkers program.  Compare this to the price of a low mileage used car found on nada.com.  The lowest price is the better value if you follow the subsequent steps.

           When evaluating a used car, first check with carfax.com to identify the history of the vehicle.  Next it is best to check with nada.com to identify the average sale price of the vehicle and compare your price to the average.   Also, your mechanic should assess the condition of the vehicle.

            There are other considerations before your purchase.  You need to call your car insurance agent and ask what it will cost for insurance on the new vehicle and the used vehicle.  For the new vehicle, you would need gap insurance because of the extreme depreciation after driving off the lot.  

            Next you may want to consider how you will pay for the vehicle.  It is always best to avoid debt by paying cash.  Credit unions are usually less expensive than banks, but consider equity loans verses car loans so that interest can be written off for federal tax purposes.  New car loans usually have lower interest rates than used car loans.

            Finally “avoid” going to the cash for clunker website at cars.gov.  They will ask for permission to take over control of your computer.  That’s right.   They are asking permission to monitor your e-mails, your phone calls, the websites you visit, and all correspondence.  Here is the exact verbiage from the website; “Any or all uses of this system, and all files on this system may be intercepted, monitored, recorded, copied, audited, inspected, and disclosed to authorized CARS, DOT, and law enforcement personnel as well as all authorized officials of other agencies, both domestic and foreign. By using this system, the user consents to such interception, monitoring, recording, copying, auditing, inspecting and disclosure at the discretion of CARS or the DOT personnel.”  I do not know what any of this has to do with cars, but beware of this intrusion of your privacy.  I now know why the current administration has czars who do not report to Congress.

     Robert Ostrander, CFP®

     SWS Advisors, Inc.

Review your chosen make and model with Consumer Reports to determine the repair experience, the safety record and the fuel efficiency.  You can also look at comparable substitutes that may fit your needs as well.  The quality and efficiency of the vehicle can pay great dividends toward lower ongoing costs.   Car and Driver magazine might also provide information about your vehicle of choice.

The next step is to review with your insurance agent the rating of and insurance cost of the vehicle.  I know a man who purchased a Maserati sports car as his primary mode of transportation.  After his purchase he found out that it could not be insured unless it was his second car.  He was forced to buy a second car so he could have insurance on the first.  He also found out after driving it a while that the car was very uncomfortable for long trips.  This is why spending a little time initially to review your decisions will help minimize costly mistakes.  Proverbs 19:2 says “It is not good to have zeal before knowledge.”

Once you are ready to begin the search for the vehicle we encourage you to use our “car purchase questionnaire” found in our Saving Without Sacrifice In Action workbook.  It lists all the features and options for a car. We would then encourage you to send it to twenty dealers to receive a bid from them.  It also provides resources for average sales prices of vehicles (kbb.com and nada.com) along with a list of websites for car searches, car parts, and fuel cost efficiency information.

If paying cash is not an option, arrange financing before meeting with the auto dealer.  A home equity loan allows for deductible interest and, if done properly, should be paid off quickly.  Next, consider credit union financing before bank financing.  Avoid financing with the dealer because many make most of their money from financing the vehicle as opposed to the actual car purchase.  Do not lease the vehicle.  Too many bad things can happen. 

Buying used is always a better value than buying new.  After identifying the car of your choice have a mechanic check it out and run any tests for potential problems.  For those of you in Christ, pray about your decision.