As the year comes to a close, tax experts and financial planners are encouraging Americans to start sorting out more than just where to ring in 2010.
CPAs and other financial experts say now is the time to get your finances straight to lessen your tax burden before the New Year rolls around.
That's especially true for the rising tide of unemployed in America for whom tax time often can be frustrating and confusing.
In the past three months alone, job losses averaged 135,000 a month, according to the Labor Department. Since the recession began in December 2007, more than 7 million jobs have been lost and the unemployment rate has doubled.
"You're seeing a trend where more people have shifted from being full-time employees to part-time of freelancers," says Adam Gottlieb, a certified public accountant with Martin Cohen CPA, a Manhattan firm that offers accounting, tax and small business consulting services. "That's a direct result of this economy."
The IRS issues year-end tax tips on its Web site each year to help Americans better understand new tax codes and filing restrictions. And CPA's from Boston to San Francisco are fielding questions from clients who are hoping smart financial moves now will allow them to reap benefits later.
Financial planners recommend reviewing your income, expenses and potential deductions before the year ends. A close look at how much you are earning, spending and saving will help better determine which deductions to pursue, say experts.
If you're in a higher tax bracket, where higher capital gains can be expected, financial advisers say you should closely review your investment portfolio to consider if taking a loss will help offset higher capital gains.
"Take a hard look at your portfolio," says Gottlieb. "You may need to sell off losing stocks or mutual funds now in order to offset any realized gains you've received from investments this year."
Deferring income until after the first of the year also can be a smart option for people not expecting to earn higher income next year. That way, you are taxed at a lower rate for 2009.
There also are tips for the rising numbers of self-employed people. Some advisors recommend issuing year-end invoices late in December in order to make it more likely that you will receive payment in January.
Self-employed Americans also should stock up on all of the business equipment and supplies they haven't yet purchased, and to make sure to mark and save all receipts.
For Americans who spent part or all of this year involuntarily unemployed, the tax code offers some relief. Under the stimulus bill, the first $2,400 in unemployment benefits earned in 2009 is exempt from federal taxes.
In addition, 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.
One area that people tend to neglect until the year comes to a close is flexible spending accounts. That's where a person has put aside tax-free earnings to cover medical and dental expenses through an employer's plan.
Those who sign-up for flexible spending accounts must use them up before Jan. 1. That means you should make doctor appointments now and buy necessary medical supplies that are covered in the plan.
Some plans even allow you to use the flexible account on things like aspirin and over-the-counter cold medicines.