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The end of 2008 is happening upon us faster than we think.
With the year drawing to a close, now is an ideal time to
review your tax situation and evaluate strategies that may
help minimize your tax bill. Once December 31 passes, your
2008 tax bill is essentially set. Taking certain steps before
then, however, can make a difference.
As is the case year after year, favorable changes to the
tax laws made in 2008 are also accompanied by unfavorable
modifications. This year end, of course, our unprecedented
financial crisis looms large. This crisis generates tax loss
situations that we may not have faced in recent years, as
well as a more urgent need to maximize current income that
involves taking steps to minimize tax payments whenever possible.
TRADITIONAL TAX STRATEGIES
Year-end tax planning tips typically fall into two general
groups: (1) the traditional strategies that have proven themselves
useful year after year, and (2) new opportunities and pitfalls
that have arisen from recent changes to the tax laws.
Tried and true tax planning techniques can help virtually
every taxpayer save money; some, of course, more than others.
How much you can save depends on your individual circumstances,
but examination of the following general areas is worth a
look --in addition to considering the tax impact of any special
circumstances in which you might find yourself this year.
Income shifting
One of the most fundamental year-end tax planning techniques
involves accelerating deductible expenses in 2008 and deferring
income, if economically feasible, into 2008. By delaying taxable
income you defer taxes. Delaying taxable income may also prevent
you from losing lucrative tax breaks that can be reduced or
eliminated altogether as your income level rises and propels
you into a higher tax bracket.
With only a few months left until the end of the year, you
can probably anticipate with reasonable certainty what income
and deductions you will be reporting on your 2008 tax return.
You may also be able to predict with relative accuracy what
your income and expenses for the first few months of 2009
will include. The ability to gauge your income and expenses
for 2008 and into 2009 provides a golden opportunity to shift
income or expenses into one year or the other depending on
what will save you the most overall taxes.
Shifting income, however, is not always a matter of simply
delaying receipt of funds. Tax rules may require you to recognize
certain types of income when you have earned the right to
receive it, even if you arrange for its delayed payment. This
office can help you recognize and navigate the differences.
Deduction management
Essential year-end tax planning requires determining whether
you will take the standard deduction or whether you will itemize
your deductions. Consider "bunching" deductible
expenses into one or the other year depending upon whether
the standard deduction may be taken in one year or whether
the adjusted gross income limits for medical (7.5 percent)
or miscellaneous itemized deductions (2 percent) may be more
easily met.
Even if you know you will itemize deductions, accelerating
or deferring them is often a question of determining your
probable tax bracket for year end and the next year to maximize
their after tax value. Sometimes planning is as simple as
paying your state estimated tax or real estate taxes in one
year or the other; at other times, it's a question of making
certain you gather the right proof and follow the proper steps
in time to be entitled to a deduction in one year or the other.
Again, this office can help.
Portfolio timing
The end of the year is the right time to examine your investments
(winners and losers over the course of the year) to take the
steps necessary to minimize your capital gains income and
maximize the benefit of any capital losses. Especially this
year, when the stock market took its roller-coaster ride,
gathering your portfolio's records for the entire year can
make a difference in not only what you might buy or sell in
November and December but what estimated tax you will need
to pay (or not pay) for the fourth quarter of 2008.
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). The strategy for
short-term gains and losses follows a similar game plan, although
coordinating the two sometimes takes special care. Unlike
excess business losses that can be carried back two years
to net an immediate refund in many cases, an individual's
net capital losses unfortunately can only be carried forward.
In calculating gains or loss for purposes of balancing your
gains and losses at year end, remember that, for tax purposes,
it's not how much your stocks have gone down for the year
but rather have much gain or loss you've realized since purchasing
them. For example, you still may owe capital gains tax on
stock acquired in 2001 at $15/share even though it may have
dropped $20 in 2008 from a high of $65 to $45 when you sold
it. You still have capital gain of $30/share on the sale.
Retirement planning
Year-end planning for 2008 also involves maximizing annual
contributions to your retirement plan accounts, since one
year's limit cannot be added to the next year's if not taken
in time. While contributions to IRAs may be applied retroactively
if made before the filing deadline, an individual's elective
deferral contribution made as an employee to a qualified plan
must be made before the end of the calendar year.
Maximizing contributions to your retirement plan (or plans)
before year end also allows you to reduce your adjusted gross
income in direct proportion to those contributions. This in
turn can give you the benefit of increasing the deductibility
of medical and other deductions subject to adjusted gross
income floors.
As many 401(k) plan account owners have realized in 2008,
managing a tax-deferred retirement account is not a "set
it and forget it" proposition. Although sheltered from
tax, a 401(k) or other defined contribution plan also requires
careful management of the performance of those investments
and re-allocation of assets whenever appropriate. Unfortunately,
losses on any 401(k) plan are not tax deductible; nor can
they offset capital gains in non-tax sheltered accounts.
Gift-giving
Slow and steady estate planning can yield dramatic results.
Nowhere is that more apparent than devising an annual gift
giving plan to family members. Before year-end 2008, you can
transfer up to $12,000 per person, per year, without paying
gift tax on the amounts transferred. Married couples can gift
$24,000 per person by "splitting" their gifts. In
2009, the annual exclusion rises to $13,000 ($26,000 for couples).
This strategy not only avoids the possibility of paying a
hefty estate tax later, but it removes earnings from those
gifts from your taxable income bracket into that of the lower-bracket
gift recipient.
NEW OPPORTUNITIES
Tax law changes constantly, and therefore so must individual
tax planning. Tax year 2008 is no exception. While fundamental
techniques should not be overlooked, attention to tax legislation
is equally important for most taxpayers. In 2008, Congress
passed a host of provisions to encourage consumers to jumpstart
the economy by having more money in their pockets to spend.
In addition to the Economic Stimulus checks that were mailed
out -for the most part- before this past September, tax legislation
in 2008 renewed or enhanced many benefits for individual taxpayers,
some only for 2008 and others for both 2008 and 2009. Maximizing
these tax benefits between 2008 and 2009, therefore, requires
care in respecting a variety of effective dates.
AMT patch. The Emergency Economic Stabilization Act of 2008
(EESA) included among its many provisions a so-called 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.
Income for forgiveness of mortgage indebtedness. Those principal-residence
homeowners who have part of their mortgage debt forgiven as
part of a workout or foreclosure have been spared having to
pay income tax on that forgiven income. The Mortgage Indebtedness
Relief Act of 2007 first applied this tax-free treatment to
debt forgiveness taking place from 2007 through 2009. The
Emergency Economic Stabilization Act of 2008 extended it through
2012.
State and local sales tax deduction. Despite being one of
the more popular tax breaks, the deduction for state and local
sales taxes is not permanent and had been set to expire at
the end of 2007. Under this deduction, taxpayers who itemize
deductions the option of claiming either state and local income
taxes or state and local general sales taxes. The Emergency
Economic Stabilization Act of 2008 extended this deduction
for 2008 and 2009.
Tuition and fees deduction. Taxpayers may continue to deduct
qualifying tuition and fees paid in 2008 that are required
for the student's enrollment or attendance at a post-secondary
school. The tuition and fees deduction is an above-the-line
write-off that, depending on adjusted gross income, can reduce
taxable income by as much as $4,000. They are frequently more
valuable than taking a Hope or Lifetime learning education
credit. Since this deduction also has been extended for 2009,
deciding in which tax year an upcoming tuition payment will
be made can help maximize your overall education deductions
and credits.
Classroom deduction. Full-time teachers, instructors, counselors,
and other educators can deduct up to $250 worth of books,
supplies, software, and other qualifying materials that they
provide out of pocket expenses. The deduction had been set
to expire at the end of 2007, but Congress now has extended
it for 2008 and 2009. Educators should remember that this
deduction is based on the calendar year rather than the school
year.
Tax-free IRAs charitable contributions. The EESA extends
through December 31, 2009, the opportunity for certain taxpayers
age 70 1/2 or older 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.
Residential energy property. The high cost of energy is encouraging
many people to make energy efficient improvements to their
homes. If you are contemplating installing energy-efficient
doors and windows, water heaters or other items in 2008, you
may want to wait until 2009.
Several years ago, Congress created a residential tax credit
for installing energy efficient doors and windows, water heaters
and similar items. The nonrefundable lifetime credit could
reach as high as $500. However, the credit expired at the
end of 2007. Surprisingly, the EESA reinstates the credit
but not for 2008. The new law reinstates the credit for 2009
through 2016. The EESA also expands the credit to include
certain stoves that use renewable plant-derived fuel along
with other enhancements; so while the credit is not available
for 2008, the expanded credit for 2009 may be worth waiting
for.
Another incentive is available in 2008 for certain energy
efficient improvements. Solar electric property, small wind
energy property and some heat pump property may qualify for
the residential alternative energy tax credit. Additionally,
you can use the residential alternative energy credit against
AMT liability in 2008.
Biking to work. Another new tax break that doesn't begin
until 2009 is 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.
To inaugurate this benefit starting in January, however, employers
must incorporate it into their written fringe benefit plan,
a process that should start soon.
Vacation Home Conversions
Gain from the sale of a principal residence that is allocable
to periods of "nonqualified use" can no longer be
excluded from the taxpayer's gain realized on its sale. A
technique that has been used by many vacation home owners
is to eventually convert that second home into a principal
residence before its sale and claim a full $250,000 principal
residence exclusion ($500,000 for joint filers) on the gain.
Due to a loophole closing provision in the 2008 Housing Assistance
Tax Act, any conversion made after December 31, 2008, cannot
shelter the portion of that gain allocable to post-2008 appreciation.
GIVE OUR OFFICE A CALL
With the complexity of the tax law, understanding what tax
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 several strategies that
you might like to utilize before year end, there are many
more techniques that can be used depending upon a client's
individual circumstances. For a more detailed plan that can
be customized to your particular circumstances, please don't
hesitate to give this office a call. 407 522 4480 ATP Business
Solutions Inc
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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