Owe less this year by spending now, really

Making donations to charity before the end of the year or buying a hybrid vehicle can help taxpayers reduce their 2008 tax burden. (Tina Fineberg/Associated Press/File 2008)

Even amid economic turmoil and stretched budgets, spending - yes, spending - can be one way to save money - on your tax return, that is.

Believe it or not, some judicious spending, along with taking other maneuvers in the next few weeks, can lessen the bite on 2008's 1040.

Among possible deduction boosters for your 2008 return: Remit in late December an estimated payment of state tax that's due in January; buy equipment now for your home business; make a mortgage payment due early next January at year end; spring for a hybrid vehicle offering a tax credit; grab a special bonus depreciation deduction for 2008 on a car bought for business use. Also, if you're a teacher, a deduction of up to $250 to pay for classroom supplies was to expire but has been revived for 2008 spending, and it's not necessary to claim itemized deductions to get it.

But here's one place you may want to postpone spending until next year. A tax credit for energy-saving improvements at home expired for 2008, but will be available once more in 2009, notes tax attorney Barbara Weltman, an editor at the J.K. Lasser tax guide. The credit is up to $500 for upgrading such items as heating and cooling equipment, insulation, and windows. As a credit, it is subtracted from your tax liability. That makes it more powerful than a deduction, which only reduces your income subject to tax.

"This doesn't have to be a big deal project, it can be just replacing a water heater that's conking out," says Weltman. But homeowners who previously claimed the full credit can't claim it again.

Being generous
Helping pinched charities in December with donations you planned to make in 2009 can speed your tax reward with a fatter deduction on 2008's return.

Want to delay payment? A donation by credit card in December can be claimed for 2008 even though the charge isn't paid until next year, notes certified public accountant Robin Christian, a senior tax analyst at the tax and accounting arm of Thomson Reuters.

A special option is open to donors age 70 1/2 or older with an individual retirement account. They can donate, after reaching that age, up to $100,000 from their IRA without having to first include the withdrawal in income and then claim an offsetting charitable deduction. That avoids a boost in income that can cause a loss of other tax benefits.

The donation must be transferred directly from the IRA trustee to the charity, or by a check made out to the charity by the trustee that you forward, cautions Christian.

Own shares worth more than you paid for them, even though the overall market is down? Donating them lets you escape capital gains tax on the appreciation and get a deduction for the shares' current value.

Capital gains?
Typical tax on a long-term capital gain from selling stock is already a low 15 percent, but people in the bottom two tax brackets who sell shares may pay no tax at all, beginning this year. That covers people with 2008 taxable income below $65,100 on a joint return and below $32,550 on a single unmarried return.

The income cap may be less restrictive than it seems, says Christian, because it is based on income after deductions and exemptions. Still, a large gain could push income over the cap and subject the gain over the cap to tax at 15 percent, she notes.

Some investors worry that the 15-percent rate will rise in an Obama administration. Financial planners say some clients with long-held gains despite the market swoon are considering a sale now to secure the 15 percent rate, and then possibly buy the shares again to bet on a recovery.

Mutual fund shock
Mutual fund investors face a capital gains tax hit if they invest in a fund late in the year and the fund then makes a taxable capital gain distribution for 2008. Strange as that may seem these days, that can happen when a fund sells some of its long-held holdings at a profit even though the fund's overall valuation is down.

"They could be selling shares they've held for ten years," says Keith Lawson, senior tax counsel at the Investment Company Institute trade group.

Alexi Maravel, a spokesman at Fidelity Investments in Boston , says the fund group expects generally smaller and fewer distributions this year.

Every fund is a specific case so investors may want to check with a fund about its plans and factor that into a buying decision, perhaps waiting until after the dividend to buy.

AMT nightmare
People subject to the alternative minimum tax may need to reject traditional year-end moves, says Randy Frischer, a partner at the national accounting firm of BDO Seidman.

One common tactic, advancing the payment of state and local taxes to bolster 2008's federal deductions, for example, can backfire since those items aren't deductible when figuring the supplemental AMT.

Likely candidates for the AMT, Frischer says, are people with large deductions in relation to their income, sizable capital gains, and even in extreme cases a large number of dependents - factors that can sharply reduce their regular tax and thus trigger the AMT. Roughly 4 million filers may be in that situation for 2008, much fewer than had Congress not enacted a one-year patch to curb the AMT's reach.

Undoing a Roth
The dive on Wall Street can be especially hard on savers who earlier this year shifted funds to a Roth IRA from a traditional IRA they had funded with deductible contributions, preferring the Roth's less restrictive and tax-free withdrawals.

The hit: They must pay tax on the value of the assets at the time of transfer, which may be higher than the account's current value.

A fix: The IRS lets you undo the exchange and go back to a traditional IRA, thus avoiding the inflated tax bite.

Still want a Roth? You can later repeat the initial IRA-to-Roth transfer, but with the taxable market value of the transfer at a presumably lower value, suggests analyst Bob Trinz at Thomson Reuters.

Spreading the wealth
Being a benefactor while alive can spread cheer and, if estate tax is a concern, draw down the eventual value of your legacy. A pattern of regular annual gifts can dramatically reduce the future assets subject to tax.

One tactic to avoid gift or estate tax problems is to make annual tax-exempt gifts below an IRS-set ceiling. For 2008 you can give up to $12,000 apiece to any number of recipients. A husband and wife can jointly double that.

Be sure a check for 2008 is sent before year-end, and cashed promptly to avoid any questions on whether it's a 2008 transaction.