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Five year-end moves to cut personal tax
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As the year draws to a close, there’s still plenty you can do to reduce your personal tax liability for 2008. Consider these possibilities.
Manage your capital gains and losses. Losses realized on your investments can be used to offset capital gains (taxed for most people at 15%), and if you have more losses than gains, you can deduct up to an additional $3,000 against your ordinary income and carry forward to future tax years losses that exceed those limits. But resist the temptation to sell depressed holdings just to generate tax losses. One useful tactic is to sell a losing holding and move the money to another stock or fund in a similar sector or with a similar objective. That way you can harvest a tax loss but still keep your investment plan in place. Be careful, you can no longer sell an investment in a taxable account, recognize the loss and purchase the same investment in your IRA prior to the exhaustion of the 30-day wash sale rule.
Avoid the kiddie tax. For taxpayers in the 10% and 15% brackets (your children, for example), 2008 brings the tantalizing prospect of a 0% rate on capital gains (instead of the usual 5%). But for 2008, investment income above $1,800 received by a child under age 19, or a child in school under age 24, is generally taxed at the parents’ top rate (as high as 35%). This “kiddie tax” could make it counterproductive to give your kids appreciated investments to take advantage of their lower gains rate.
Minimize exposure to the AMT. Staying clear of the alternative minimum tax is more art than science, but in some cases year-end moves could make a difference. The AMT is a parallel tax system that excludes many items you could normally deduct, and exercising incentive stock options or taking large tax credits or deductions that aren’t allowed under the AMT could make you subject to the tax. If your accountant thinks you’re likely to pay the AMT, you may want to minimize those deductions and credits or try to defer them to the following year.
Get credit for your charitable donations. You can generally deduct the full amount of monetary gifts to charity, including donations made by check or credit card. But the tax law imposes stringent record-keeping requirements, and for each deduction, you’ll need a receipt or other written communication from the nonprofit showing how much you gave and when. To beat the end-of-year deadline, you can charge a gift with your credit card in December even if you don’t pay the bill until January or later. Track your charitable deduction along with fair market value at ItsDeductible.com.
Estimate whether you can deduct medical expenses. Doctor bills, prescription costs, and other expenses are deductible only to the extent the annual total exceeds 7.5% of your adjusted gross income. If you’re at or near the 7.5% mark for 2008, you could schedule routine exams or other elective expenses in December to put you over the top. But if you have no shot at a deduction this year, you may as well postpone these expenses to January and try again next year.
Tom Taylor, CPA is a fee-only Financial Planner and Certified Public Accountant and can be contacted HERE. He is a member of NAPFA and the MACPA.
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