Careful tax planning can eventually pay with meaningful savings

By law, I don't have to start taking money out of my traditional IRA until 2017, after I turn 70 1/2. But I took my first withdrawal in September and plan to keep taking them every month.

I can withdraw some IRA money this year, and most likely every year from now on, and stay within the 15 percent tax bracket, the second lowest.

Every dollar I withdraw costs me just 15 cents in federal income taxes, probably the least I'll ever pay.

Or, if I don't need or want to spend this money, I could convert just enough of my traditional IRA each year into a Roth IRA to stay in the 15 percent bracket.

Whichever way, if I don't start taking money out of my traditional IRA now, mandatory withdrawals after age 70 1/2 would most likely push me into a higher tax bracket (the next one jumps to 25 percent now).

The point: Tax planning pays, with meaningful savings if you avoid going beyond the 15 percent bracket (for married couples filing jointly, that's up to $65,100 of taxable income in 2008 and a projected $67,900 in 2009). Under current law, taxpayers in the 10 and 15 percent brackets don't have to pay any tax on long-term capital gains in 2008, 2009, and 2010 (but the gains do count as income in determining our bracket).

Tax bracket means simply the rate at which our last dollar of ordinary taxable income is taxed.

"Tax planning begins with such simple things as knowing your tax bracket," said Mark Luscombe, principal federal tax analyst for tax publisher CCH, a unit of Wolters Kluwer.

One way to try to lower our tax bracket is to contribute to tax-advantaged retirement plans, such as deductible IRAs and 401(k)s, because those contributions don't count as taxable income.

Another is to "bunch" itemized deductions, taking as many as possible in the year they provide the most benefit.

Tax brackets, standard deduction, and exemption amounts are indexed for inflation each year, based on changes on the consumer price index for the 12 months ending the previous August. Based on those figures, CCH, Thomson Reuters, and other tax analysts, as they accurately do every year, have already calculated key tax figures for 2009 (although they won't be official until the Internal Revenue Service announces them, likely in December).

For single taxpayers, the standard deduction is projected to rise from $5,450 this year to $5,700 in 2009. For married filing jointly, it would go from $10,900 to $11,400. The personal exemption amount would rise from $3,500 to $3,650.

Both for this year and next, nonitemizers can claim an additional standard deduction of up to $1,000 for property taxes paid.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel. He can be reached at AskHumberto@aol.com.