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Rachlin partner Carl Howden shares the following important information to help you prepare for the end of the year. Do your homework now and you may help minimize tax consequences later. |
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Nobody likes to think about taxes, especially now that the Holiday Season is here! However, as we approach year-end, it's again time to focus on last-minute moves you can make to save taxes-both on your 2007 return and in future years, as tax planning should always be a multi-year project. We've listed below just a few money-saving ideas here that you may want to put into action before the end of the year. Contact us if you have questions about which ideas may be appropriate for you and to discuss other tax-saving strategies.
- If you expect to be in a lower or at least no higher tax bracket next year, consider pulling some otherwise 2008 deductions into this year. Charitable donations work well for this strategy. You can even use a credit card to make the donation if you're short on cash. You can also accelerate your final estimated payment for applicable state or local taxes and certain property taxes, but watch out for the Alternative Minimum Tax ("AMT"), as these taxes are not deductible for AMT. On the income side, ask your employer if compensation yet to be paid in 2007 can be deferred into next year. And remember, the sales tax deduction is scheduled to expire at the end of 2007, so if you qualify and were going to make a large purchase that would qualify, do so before the end of this year.
- If you own a cash-basis business, you can lower your 2007 taxable income by accelerating payment of certain expenses, such as office supplies and repairs and maintenance into 2007. And, cash-basis businesses can delay year-end billings until 2008 to shift income into next year.
- Watch out for new charitable contribution rules for 2007. You can no longer deduct any cash contribution unless you retain either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain a charity-provided statement that meets tax-law standards.
- If you expect to be in a 15% or lower regular income tax bracket for 2008, you might benefit from postponing sales of long-term capital gain (LTCG) property, such as appreciated securities you’ve held for over a year, until 2008 when your tax rate on such sales will be 0%. For 2008, your tax bracket won’t go over 15% (so your LTCGs will be taxed at 0%) if your taxable income (including your LTCGs) doesn’t go over about $65,000 if you’re married and file jointly; $32,000 if you’re single.
- If you’re age 70½, or older, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to a charity. Such a transfer is federal-income-tax-free to you, but you don’t get to claim any itemized deductions on your Form 1040. However, the tax-free treatment equates to a 100% writeoff, and you don’t have to itemize your deductions to get it. Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. This favorable provision will expire at the end of this year unless Congress extends it.
- If you have access to a flexible spending account arrangement through your employer that allows you to put aside pre-tax money for out-of-pocket medical or childcare expenses, make sure you’re maximizing the tax advantages of it since the 2008 enrollment period comes up soon.
- If you are going to owe income taxes for 2007, consider bumping up the Federal income taxes withheld from your paychecks now through the end of 2007 so that your total tax payments (estimated payments plus withholdings) equal at least 90% of your estimated 2007 liability or, if smaller, 100% of last year’s liability (110% if your 2006 AGI exceeded $150,000). When you file your return, you will still have to pay the taxes due less the amount paid in, but interest and penalties will be minimized, if not eliminated.
- Maximize your contribution to retirement plans, especially 401(k) accounts. For 2007, the maximum contribution is $15,500 ($20,500 if over age 50). For the self-employed, Keogh plans must be set up by December 31, but can be funded by the due date of your tax return.
- Watch out for the “kiddie tax.” Starting next year, this tax will apply to children for a much longer period (from 18 to possibly up through age 23), so consider their investments now and possibly accelerate investment income into 2007 to take advantage of lower tax brackets if you can.
- Section 179, which provides the ability to write off qualifying business-use assets, is $125,000 for 2007 (subject to phase-outs and business income limitations). So, consider acquiring and placing applicable assets into service before year-end to get this deduction.
- For 2007, the gift tax exclusion amount is $12,000 per donee.
- Watch out for the alternative minimum tax (AMT) in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem and negate regular tax savings. Congress is currently working on a 2007 AMT “patch” that they hope will be in place very soon. If the legislation does not go through, the AMT will snare more taxpayers than ever before.
Again, these are just a few suggestions to get you thinking. Please call us if you'd like to know more about them and to discuss other ideas to keep your taxes to an absolute minimum.
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