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5 Great Ways to Trim Your Taxes

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No, you don't have to panic yet -- there's still plenty of time before April 15. But with March around the corner, you really shouldn't put off thinking about your taxes much longer.

I don't know about you, but for me, the best incentive to dive into all those returns and year-end statements every year comes from looking at all the things you can do to cut your tax bill. You can even do a few things that will cut your tax bill for last year -- and even with the others, getting a head-start on 2009 will pay big dividends in the future.

Here are the five best things you can do to trim your taxes, both now and in the future:

1. Open an IRA.
At the top of the list is the perennial call to contribute to your IRA. It's the top tip for two reasons: it's simple, and it's one of the few strategies that let you turn back the clock and cut your taxes for 2008. You can put as much as $5,000 in an IRA for 2008, with a bonus $1,000 extra if you're 50 or older.

Depending on your preferences (and your eligibility), you can opt for a big tax break now or a potentially huge one later, by picking either a traditional or a Roth IRA. But don't wait too long -- after April 15, you won't have a chance to cut your 2008 tax bill.

2. Boost your 401(k).
If you're lucky enough to have the chance to contribute to a retirement plan at work, it can be an even bigger tax saver than an IRA. The IRS doesn't let you go back and make late contributions for 2008, but anything you put into your 401(k) or other retirement plan won't count as income on your 2009 tax returns.

This year, you can save an extra $1,000 in a 401(k) -- the limit rises to $16,500 in 2009, with those 50 or older getting another $5,500. That can save you thousands on your tax bill, so don't put off talking to your HR department any longer.

3. Cash in tax-free.
Sure, capital gains were hard to come by in 2008. But if you have long-held stocks like Microsoft (Nasdaq: MSFT  ) or Wal-Mart (NYSE: WMT  ) that have risen in value over the years, you might want to consider selling if you don't have a lot of income.

You see, a 0% tax rate applies to capital gains for those in the 15% tax bracket (or lower). For married couples, that means that if you have taxable income of $67,900 in 2009 (after deductions and exemptions), you won't have to pay any tax on capital gains until your total income goes above that. If you have taxable income of $60,000, you could realize as much as $7,900 in gains without paying a cent of tax.

4. Enjoy those dividends.
I've been pushing dividend-paying stocks pretty hard lately, because their income payouts are better than what you'll get on bonds these days. Check out the yields on some of these dividend payers, whose low payout ratios make their dividends appear sustainable for the future:

Stock

Dividend Yield

Payout Ratio

McDonald's (NYSE: MCD  )

3.8%

43%

Johnson & Johnson (NYSE: JNJ  )

3.5%

39%

Kellogg (NYSE: K  )

3.5%

54%

PepsiCo (NYSE: PEP  )

3.4%

50%

3M (NYSE: MMM  )

4.4%

41%

Source: Yahoo! Finance, DividendInvestor.com.

Better yet, the same 0% tax rate also applies to qualified dividends on certain stocks. That turns a great yield into a fantastic one.

5. Grab tax-cutting perks.
If you haven't looked at your employee benefits closely, you might be missing out on great deals. With so-called flex plans, you can save pre-tax dollars and use them for medical or child-care expenses, saving hundreds or even thousands in taxes on that money. Some may have access to more advanced strategies, such as health savings accounts. Whatever you have, make the most of it.

So don't despair about your taxes yet -- you have plenty of time to get them done. That said, the sooner you start, the more you'll be able to save for this year, next year, and beyond -- so get going!

More on finding the best tax benefits:

Inside our Rule Your Retirement newsletter, you'll find a lot of useful advice on taxes, including how to use IRAs and 401(k) accounts to your best advantage. Learn more by signing up for our free 30-day trial.

Fool contributor Dan Caplinger always tries to trim taxes. He doesn't own shares of the companies mentioned. PepsiCo and Johnson & Johnson are Motley Fool Income Investor selections. Wal-Mart Stores, Microsoft, and 3M are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always looks slimming on you.


Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2009, at 2:20 AM, nicko168 wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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