december 13 , 2009 - As the end of the year approaches, I'm wondering, what can I do now to lower my tax bill next April?

Although there are only a few weeks left to go before the year ends, it's not too late to implement some planning moves that can improve your tax situation for 2009 and beyond.

Make year-end gifts. A person can give any other person up to $13,000 for 2009 without incurring any gift tax. The annual exclusion amount increases to $26,000 per donee if the donor's spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. Besides avoiding transfer tax, annual exclusion gifts take future appreciation in the value of the gift property out of the donor's estate, and shift the income tax obligation on the property's earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax). A gift by check to a noncharitable donee is considered to be a completed gift for gift and estate tax purposes generally on the date which the donee deposits or cashes the check.

Increase withholding to help avoid estimated tax underpayment penalty. An employee may discover that his prepayments of tax for 2009 have been too small because, for example, his estimate of income or deductions was off and he underwithheld, too little was withheld as a result of the making work pay credit, or he failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. To ward off or reduce an estimated tax underpayment penalty, the employee can ask his employer to increase withholding for his last paycheck or paychecks to make up or reduce the deficiency. He can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax.

Deplete health FSA accounts. Employees who participate in their employer's health flexible spending account (FSA) should keep in mind that medical expenses reimbursed under the account generally must be incurred during the participant's period of coverage (normally 12 months) under the FSA. Although IRS has allowed employers to provide an additional 2 1/2 month grace period in which employees can incur expenses and still obtain reimbursements of these amounts, many employers have not availed themselves of this opportunity. As a result, an employee whose period of coverage ends on Dec. 31 should be sure to deplete his health FSA before the year's end (e.g., by getting new contact lenses) or he'll lose what's left in the account. Expenses are treated as having been incurred when the participant is provided with the medical care that gives rise to the expenses, and not when the participant is formally billed or charged for, or pays for, the medical care.

Qualified motor vehicle taxes. Unless Congress changes the law, for 2010, a taxpayer won't be able to deduct qualified motor vehicle taxes whether or not the taxpayer itemizes deductions. So if a taxpayer is intending to purchase a qualified motor vehicle soon, he should do it before year end. Provided the taxpayer meets certain conditions, it will assure him a deduction for any qualified motor vehicle taxes paid on the purchase whether or not he itemizes and whether or not Congress extends the optional itemized deduction for sales tax in lieu of income tax, which also is scheduled to expire this year. Even if the optional sales tax deduction is extended as expected, the taxpayer would have to give up the itemized deduction for state and local income taxes to take advantage of it for a 2010 purchase. By purchasing this year, the taxpayer can both deduct sales tax on a qualifying motor vehicle purchase and get an itemized deduction for state and local income taxes. The deduction applies to the vehicle's purchase price up the $49,500 and is phased out for single taxpayers when adjusted gross income is between $125,000 and $135,000 ($250,000 and $260,000, on a joint return).

Purchase of energy saving home improvements before year's end. It is still not to late to achieve tax savings by purchasing energy saving home improvements before year end.

Nonbusiness energy property credit. In 2009 and 2010, a taxpayer can claim a credit equal to 30% of the sum of the cost of: qualified energy efficiency improvements to his home (e.g., energy-efficient windows, doors, insulation materials, and certain roofs) and residential energy property expenditures (e.g., high-efficiency heat pumps, air conditioners, water heaters, and stoves that burn biomass fuel), up to an aggregate amount of $1,500.

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