The Savage Truth on Money by Terry Savage

The last weeks in December provide an even better opportunity than early April to re-organize your financial life — if you can — to save money on your tax bill next spring.

One thing is sure: Income taxes are going up in the future. Some changes may not hit until 2011, after the year-end expiration of the George W. Bush tax cut plan. Others will take place during the year, as Congress trades favors to extend some of those previous cuts. The likely places to look are the estate tax and the tax on dividends.

But if Washington keeps spending — on both sides of the aisle — they'll have to pay for it somehow. Don't look now, but all those fingers are pointing at you. So take these tips to heart, because next year is certain to provide many changes.

Have a baby now! If you're already pregnant and deliver before Dec. 31 ends, it could save you thousands of dollars on your tax return! Babies born before the new year rings in at midnight Dec. 31 provide a $3,650 tax exemption when parents file their return next April.

Plus, lower-income families may get a child tax credit of up to $1,000 per child — refundable if they have no income tax liability. And the baby may also generate the Earned Income Tax Credit — a refundable credit for low-income workers, with the amount depending on their earnings and the number of children they have.

One more thing: Even if baby doesn't arrive before the stroke of midnight, proud grandparents and parents can open a 529 college savings plan this year, naming the baby as beneficiary when it arrives next year. You don't get a federal tax break for the contribution, but many states, like Illinois, do give a break on state taxes for contributions up to $10,000.

Organize your income. For those who get a regular paycheck, the taxes will depend on the year in which the income is paid — not on when you deposit the check! That income will be included in the W-2 form you receive in January.

But independent contractors or small businesses taxed as individuals, there may be a choice of when to bill for, and receive, income. Traditionally, the idea has been to defer income to future years while taking deductions this year, in order to reduce your tax bill. But if you expect income taxes to rise, or deductions to disappear, you might want to reverse that process — and take income now, before year-end.

Of course, you'll want to check with your accountant on this, because accelerating income this year may disqualify you from certain tax credits — such as deductions for "green" home improvements — or it may be enough to move you into a higher tax bracket.

Check the tax calculator at the website of H&R Block (www.hrblock.com) to help figure out the impact of your moves.

Consider deductions. To lower your income this year, make charitable contributions now. That's not only tax-wise, but desperately needed by hard-hit charities this year. Remember, for gifts over $250, the organization must give you written acknowledgment. And you'll also need an appraisal for any donated items, such as clothing or household goods.

Prepay your property taxes before Dec. 31 to get the deduction this year. If you're paying tuition and eligible for programs like Lifetime Learning Credit or Hope Credit, or if you qualify for tax deductions simply for higher education bills, consider paying those bills in December, to qualify for the credit on your tax return next April.

Stock losses count. If you have a stock loss outside your retirement account, taking it now could offset taxes on up to $3,000 of ordinary income — and you can carry unused losses forward for future years. Or you could sell some stocks at a profit, and offset those profits by selling others at a loss. Just remember that profits on stocks held longer than a year are taxed at a very favorable capital gains tax rate — a rate that may or may not be around in 2010.

Don't take IRA withdrawals. Remember, this is the year that you are not required to withdraw a minimum distribution from your IRA if you don't need the money and would rather keep it invested. Avoiding withdrawals lowers your income tax bill. (See my Oct. 12 column online at creators.com). And if you took a withdrawal earlier in December, you may return it without penalty. (Withdrawals taken earlier this year had to be returned by Nov. 30.)

Taxes on debt relief. Until the 2007 Mortgage Forgiveness Debt Relief Act, any amount "forgiven" on a foreclosure was considered taxable income! You don't have to worry about that anymore. But that's not the case if you were able to negotiate a settlement on your credit card debt outside of bankruptcy. If your card lender agreed to accept a lower payoff, you're likely to receive a 1099-C "cancellation of debt" notice, showing the amount written off as taxable income to you. So be prepared.

That seems a sad way to end a holiday column on taxes — but then I think all tax columns are gloomy because they involve money you earned. And now you must deal with giving the government its share of your hard work. Oh well, on the bright side, you could consider it your holiday present to Uncle Sam. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.

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