Say Goodbye to 2008 with Some Smart Tax Moves

December 1, 2008

December’s a busy month with holiday preparations, but it’s not too late to focus on last-minute tax savings. Consult with your tax professional to see if these might work for you:

Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.

Check investment gains and losses: After the market drops we’ve seen this year, it’s likely you have some capital losses in your taxable investment accounts.  It might make sense to sell and offset them against any capital gains you’ve realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.  Note: According to Morningstar.com a lot of mutual funds are expected to distribute capital gains to shareholders, despite funds being down 30-40%.  Check your mutual funds to see if you are expected to receive a capital gain distribution; if so, it might make sense to do some tax loss selling before the December distribution to avoid another taxable event.

Prepay property taxes: If your income is higher in 2008 than in previous years (or higher than your expected 2009 income), it might pay to accelerate deductions.  If so, make sure you pay your property taxes before the end of the year.  If you typically pay property taxes early in the next year, consider pre-paying those expenses so you can deduct them on your 2008 tax return.

Prepay state taxes: Again, if it makes sense based on your tax situation, consider making your fourth-quarter estimated state tax payment in December instead of in January so you can take the deduction on your 2008 return.

Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2008 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.

Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year (Okay, I realize most stocks didn’t have a gain this year, but if you have stocks you’ve held for a long time, it’s possible you still have a gain), you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.

Make sure donations are documented: As of January 1, 2007, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don’t have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.

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Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

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Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.