Early tax planning can save you money
Changes in tax rules open the door to moves that may reduce your tax bill.
As Americans continue to weather what most financial experts view as the worst economy since World War II, effective tax planning has never been more important. Any successful year-end strategy should involve maximizing results for both tax years 2008 and 2009. Crafting that plan will test your assumptions regarding future income, the direction of financial markets, and possible changes in the federal tax code.Skip to next paragraph
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The treatment of all tax issues is complicated and individual. So before finalizing any critical tax decisions this year, it's best to review them with a tax accountant.
Some year-end topics to consider are:
The Alternative Minimum Tax (AMT) has become the most feared status, initially created by Congress to target a small group of high-income people who were not paying any taxes. It has rapidly expanded to include an increasingly large swath of individuals in high tax areas such as California, New York, and New Jersey, affecting people who earn between $100,000 and $500,000 annually.
If you determine that you are subject to AMT in 2008, accelerate ordinary and short-term capital gains income into this year, and wait until 2009 to make any moves – for example, charitable contributions – that will result in tax deductions. Remember that state and local income taxes, real estate taxes, and tax-advisory expenses are not deductible under the AMT. This year, Congress put a patch on the AMT to reduce the number of people affected. AMT exceptions for 2008 apply to single filers with adjusted gross incomes (AGI) of $46,200 and $69,950 for those married filing jointly.
Pace your income and deductions
Use an alternate-year deduction strategy, shifting tax-deductible expenditures into every other year to boost tax savings. In off years, claim the standard deduction. By focusing deductions into a single year, you increase the possibility that they will exceed the 2 percent of AGI required to write them off.
In addition, if you expect your income to be higher next year, pull income into 2008 and push deductions into 2009. If you expect to earn the same both years or you might earn less in 2009, take deductions in 2008, and defer income into 2009.
Sales or income taxes
The choice to deduct state and local income or sales taxes on your federal return was extended through 2009 as part of the bailout bill. This issue is important for retirees who don't have taxable income and for residents in states without income taxes such as Florida, Texas, and Washington. Deduct the tax which costs you the most.
Sell some losing stocks
Given the stock market's 2008 plunge, you may want to realize losses by selling losing investments before year-end. Lower your 2008 tax bill by deducting capital losses against any capital gains that you may have had during the first eight months of the year. If you have additional capital losses, carry them forward into 2009.
Timing mutual fund sales
Act quickly to take advantage of this strategy. Check with your broker to determine whether you will get a taxable distribution from your mutual fund before mid-December. Even if your investment portfolio has taken a loss, the distribution could create a capital gain and extra taxes. Consider selling the mutual fund ahead of the distribution and realizing the capital loss.
Put money from the sale into an index fund. Do not buy back the original investment for two months or longer or you may be assessed for short-term trading.