Now that we know who will have his hands on the reins of power in Washington next year, tax planning for 2008 just got easier. In addition to what I discussed last week, here are some other strategies you should consider:
Income and expense shifting. Review your income and expenses and, to the extent possible, shift them between this year and next in order to maximize your tax benefits. For example, if you expect your tax rates to be lower next year, as Obama has promised 98% of taxpayers, pay your January 2009 mortgage payment in December of this year giving you an ‘extra’ interest deduction. Where possible, business owners should pay early 2009 expenses in 2008. Also, postpone year-end bonuses until early January. Finally, consider making some of your 2009 charitable contributions in 2008. If you expect to be among the two percent who will be in a higher tax bracket next year, do the opposite.
Review investments for gains and losses. If you have invested in stocks in the past several years, you are likely to have losses. By selling before year-end, you ‘realize’ those losses and can deduct them against any gains, this year or in the future. As a bonus, up to $3,000 of losses may be taken against ordinary income in this and future years. If you remain confident in the long-term viability of your stock purchases, you can buy them back after thirty-one days and still reap the tax benefits.
Determine your likely 2008 tax bracket. If it is 15% or less, the tax rate on stocks sold for long-term capital gains is 0%. For 2008, the joint filers cut-off for the 15% tax bracket is $65,100 and for single filers, it’s $32,550.
Additional thoughts on charitable planning. Congress extended the law allowing people over the age of 70 ½ to transfer up to $100,000 directly from their IRA account to a charity without paying any income taxes. While you don’t receive a deduction for the gift, the transfer is not considered income to you. The old rules required that you withdraw your money from your IRA; pay ordinary income taxes and then receive a tax deduction for your charitable gift.
Many people are in the habit of gifting appreciated stock each year to meet their charitable pledges. With a bear market of this magnitude, many stocks that once had large long-term capital gains such as Regions, Wachovia and Protective Life, now may have losses. Gifting stocks with losses is a bad idea since you cannot take the losses off of your income tax return. Instead, sell the stock, realize the losses for income tax purposes and gift the cash.
Review your tax withholding. In an effort to avoid making Uncle Sam a ‘tax-free loan’ many taxpayers minimize income tax withholding only to find they owe an under-withholding penalty at tax filing time. Check your status now and, if necessary, increase withholding for the balance of the year. To avoid a penalty, you must have paid in either 100% (110% if your AGI exceeds $150,000) of last year’s tax or 90% of the actual tax you will owe.
Meet with your tax advisor this year for his or her additional thoughts and strategies.