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Although the majority of taxpayers think of April 15th as
their deadline for federal tax purposes over the course of
any single year, looking at December 31st as a more important
date makes much more sense for many taxpayers. You always
can file an extension to avoid the April 15th deadline; but
you can't move the end of your tax year.
Once December 31 passes, your taxable income, deductions,
credits and tax liability for the year are all "set in
concrete" with little if any opportunity to change the
outcome. As a result, year-end tax planning should form an
essential part of your financial strategy. Changes brought
about during this year, and forecasts for 2009, make that
advice even more compelling for year-end 2008.
Effective year-end tax planning for 2008 combines use of
traditional techniques of acceleration and deferral of income/deductions
with appropriate responses to a constantly changing tax landscape.
Change in 2008 in particular has come in four unique ways
over the past several months:
" The impact that the current financial crisis has had
on the value of our homes, debt management, investment portfolios
and retirement savings is obvious; some tax-wise ways to manage
this crisis on a personal level are available.
" Several tax breaks will end on December 31, 2008. Still
others have been extended or enhanced by the recently-passed
Emergency Economic Stabilization Act of 2008. Both situations
require proactive responses to maximize tax benefits.
" New energy tax incentives are now available, thanks
again to the Emergency Economic Stabilization Act of 2008.
When combined with rising fuel prices, these incentives for
"going green" are now worth serious investigation,
by individuals and businesses alike.
" The prospect of major upheavals in our tax laws in
2009 makes the need to maximize tax savings in 2008 more urgent.
The possibility of retroactive tax law changes by the next
Administration to the start of 2009, as well as alternative
minimum tax (AMT) reform and sun-setting of favorable tax
rates under the "Bush tax cuts," are real.
Traditional Planning
Traditional year-end tax planning incorporates a standard
set of considerations but is far from a one-size-fits-all
process. Every plan must account for the particular needs
and circumstances of each individual or business.
Income shifting. Individuals and businesses alike can benefit
from the classic strategy of shifting taxable income and accelerating
or deferring deductions between 2008 and 2009 by controlling
the receipt of income and payment of expenses. Taxpayers expecting
to be in the same or lower tax bracket in 2009 should consider
deferring income until next year and accelerating deductible
expenses in 2008. Alternatively, if a substantial increase
in income is anticipated in 2009 (propelling the taxpayer
into a higher tax bracket), income should be accelerated in
2008 and deductions deferred until next year.
Capital losses. Long-term capital losses can be used to fully
offset long-term capital gains. Losses taken in excess of
gains can also be used to offset up to $3,000 in ordinary
income (or $1,500 for a married couple filing separately).
Short-term losses can be used to offset short-term gains that
are otherwise taxable at your ordinary income tax rate (which
can reach as high as 35 percent). Unlike carrybacks for businesses,
excess capital losses incurred by individuals may only be
carried forward.
Casualty losses. Both individuals and businesses are also
allowed deductions for casualty and theft losses; and capital
losses. Deductions by individual taxpayers for those losses,
however, are limited. Casualty losses generally are deductible
only if deductions are itemized and then subject to both a
$100 deductible per occurrence and a 10 percent adjusted gross
income limitation. The Emergency Economic Stabilization Act
of 2008, however, provides some further relief to victims
of certain natural disasters during 2008.
Life events. A birth of a child, a marriage, divorce, death,
new job, loss of a job, new home, foreclosed home, and other
"major life changes" also typically have significant
tax implications. Many of the applicable tax rules are tied
to the calendar year in which they occur.
Business losses. Business loss deductions can be taken for
bad debts, losses on the sale of business assets and net operating
losses. If a business had a bad year in 2008 but had profitable
years in 2006 or 2007, a carryback of net operating losses
when the 2008 tax return is filed will allow the business
to apply for an immediate refund based on use of those losses.
A carryforward of up to 20 years is also permitted.
Temporary Tax Breaks
Many tax breaks are "temporary." They are enacted
for a one or two year period, with the next Congress left
with the decision over whether to continue them longer. Congress
in 2008 made a decision to let several provisions expire;
but it also extended (and in some cases enhanced) many others.
In any case, action in 2008 is necessary. For those tax breaks
that end in 2008, action before year-end 2008 is essential;
for those that apply to both 2008 and 2009, remember that
you don't get double the amount in 2009 if you don't take
the necessary action to qualify you in 2008.
Here is a partial list of those tax breaks especially relevant
to 2008 year-end planning:
AMT patch. The Emergency Economic Stabilization Act of 2008
(EESA) included among its many provisions an alternative minimum
tax (AMT) patch. For the 2008 tax year, the AMT exemption
amounts are raised to once again insulate most middle-income
taxpayers from the reach of the AMT. The patch is only for
2008. Hopes are high that in 2009 Congress finally will face
up to the need to find a permanent solution to the AMT and
pass AMT reform rather than yet another patch.
Property tax standard deduction. The Housing Assistance Tax
Act of 2008 gives non-itemizers a limited deduction for state
and local real property taxes for 2008, to a maximum $1,000
($500 for single individuals). The EESA extends the same relief
to 2009.
State and local sales tax deduction. The American Jobs Creation
Act of 2004 and subsequent legislation allowed individuals
to deduct state and local general sales taxes in lieu of state
and local income taxes. This deduction expired at the end
of 2007. The EESA makes the deduction retroactive for 2008
and extends it for two years through December 31, 2009.
Higher education tuition deduction. The EESA extends through
December 31, 2009, the above-the-line higher education tuition
deduction. The deduction allows eligible taxpayers to deduct
the costs of qualified higher education expenses paid during
the year for themselves, a spouse, or a dependent.
Tax-free IRAs charitable contributions. The EESA extends
through December 31, 2009, the opportunity for certain taxpayers
age 70 1/2 or over to make tax-free distributions from IRAs
for charitable purposes. This contribution can include any
required minimum distribution that the taxpayer would be otherwise
required to take.
Bonus depreciation. For businesses, the Economic Stimulus
Act of 2008 provides 50 percent bonus depreciation of the
adjusted basis of qualifying property. The property generally
must be purchased and placed in service during 2008.
Enhanced expensing. Also specifically for businesses, the
Economic Stimulus Act of 2008 increases the amount of deductible
Code Sec. 179 expensing for 2008 and increases the threshold
for reducing the deduction. The enhanced expensing provision
applies to business property purchased and placed in service
in tax years beginning in 2008.
Research tax credit. For businesses, the EESA extends the
research tax credit to amounts paid or incurred in 2008 and
2009. It also modifies the credit, increasing the alternative
simplified credit, which promises to transform the research
credit into a greater benefit for smaller businesses.
Energy Incentives
The Emergency Economic Stabilization Act extends a host of
energy tax incentives, some targeted to consumers and others
to producers and manufacturers. The new law also introduces
many favorable changes in qualifying for these tax breaks.
Many of the extensions go beyond the one or two year periods
that Congress authorized for non-energy extenders. New solar
and wind power industries will arise due to these powerful
tax breaks.
Residential energy property. The energy incentive impacting
most individuals is the credit for the purchase of residential
energy property. A credit of up to $500 is available in 2009
for nonbusiness energy property that meets the requirements
for qualified energy efficiency improvements or qualified
residential energy property expenditures. Eligible improvements
include insulation materials, exterior windows, including
skylights and exterior doors. If you are planning any of these
improvements soon, waiting to complete them until early 2009
makes sense because of this credits new effective date.
Commercial buildings. A deduction for energy efficient commercial
buildings is extended through December 31, 2013. Congress
also modified the energy efficient appliance credit for manufacturers
of qualifying dishwashers, clothes washers, and refrigerators.
Biking to work. The EESA introduces a new employer- provided
transportation fringe benefit. In addition to transit passes
and van pooling, employers starting in 2009 can offer their
employees up to $20/month as a tax-free benefit if they commute
to work by bicycle.
Give our office a call 407 522 4480
Because of the complexity of the tax law, understanding what
planning provisions to incorporate into your year-end tax
planning strategy can be a daunting task. While this letter
hopefully gives you a heads-up on at least several tax opportunities
on which you might follow through before year end, there are
many more techniques that can be used depending upon your
individual circumstances. For a more detailed plan that can
be customized to your particular circumstances, please don't
hesitate to give our office a call.
Reproduced with permission from CCH's Client Letter, published
and copyrighted by CCH Incorporated, 2700 Lake Cook Road,
Riverwoods, IL 60015.
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