Year End Tax Planning Checklist- 12/9/07

Year End Tax Planning Checklist- 12/9/07

Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC

Year End Tax Planning Checklist


“Year-End Tax Planning Checklist”


With 3 weeks remaining in 2007, now is the time to take one final look to see how you can cut your income tax bill.  Here’s my checklist of ‘must-do’s’ before December 31:

  • Max out your 401k plan.  You should have at least one paycheck remaining and can have your employer ‘catch-up’ your contributions by using your remaining paychecks.  If you need the cash to pay bills, use your savings.  As a result, you’ll get a nice tax deduction for 2007.
  • If you are self-employed, you have until December 31 to sign plan documents if you want to set up a qualified retirement plan such as a 401k, profit sharing plan, or defined benefit plan.  You can then fund it early next year and still get a 2007 tax deduction.  If you are a solo self-employed, consider a Single-Person 401k.  You’ll be able to maximize your deductions with a minimal of administrative costs.
  • Avoid federal penalties and interest by making certain you have paid in the lesser of 100% of your tax liability from 2006 (110% if your 2006 adjusted gross income was over $150,000) or 90% of your actual 2007 liability.
  • Harvest your tax losses.  By selling stocks that have losses (stocks that are worth less than you paid), you create ‘realized’ losses that can be used to offset realized gains for 2007.  Up to $3,000 of excess losses over gains can be used against ordinary income.
  • Avoid buying mutual funds at year-end in taxable accounts.  You can end up with a nasty tax surprise since all mutual funds must declare 90% of their gains before year-end.  You could end up invested for a short time, have no gains but get hit with a taxable distribution.
  • Make gifts to family members.  You’re allowed to give up to $12,000 ($24,000 for couples) to as many people as you wish without paying gift taxes.  This reduces your estate for estate tax purposes and shifts future income and appreciation to the family member who may be in a lower tax bracket.
  • Make gifts to charities.  All gifts must be made by year-end in order to receive a deduction this year.  If you use your credit card to make gifts, the date of the charge determines the date of the gift.  For cash, the date of the receipt applies.  For stocks, the date of the actual transfer into the charity’s brokerage account determines the gift date.  Gifts by check are determined by the date of the post-mark.
  • Consider gifting to charities directly from an IRA account.  2007 is the last year you can gift up to $100,000 directly from your IRA account to a charity.  You must be age 70 ½ or older and other rules apply.
  • Make sure you take your Required Minimum Distribution (RMD) from your retirement account(s) this year.  If you are age 70½ or older and subject to Required Minimum Distributions (RMDs), you’ll face a stiff 50% penalty for not taking these required timely withdrawals.
  • By making your January 2008 mortgage payment in December, you’ll get to deduct the January interest in 2007.
  • While state income taxes are not due until January 15, 2008, paying them in December will get you a federal tax deduction in 2007.

Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year.