By: Trey Whitt, CPA
Now is the time to plan moves that will help lower your tax bill this year and possibly the next. With the stock market's swoon and the current economic climate, there is a strong possibility that tax changes will be made next year.
Below is a checklist of items that may help you save tax dollars if you act before year-end. We can help you determine the specific actions that are best for you. Act now because many of these tax-saving moves must be made before the end of 2008.
* Realize losses on stock while substantially preserving your investment position. One option is to sell the original holding, then buy back the same securities at least 31 days later. Meet with us to discuss year-end trades you should consider making.
* Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that over-the-counter drugs, such as aspirin and antacids qualify for tax-free reimbursement.
* If you believe a Roth IRA may be a better option than a traditional IRA, consider converting traditional-IRA money into Roth IRAs if you are eligible. Keep in mind that converting will increase your adjusted gross income for 2008.
* It may be advantageous to defer a bonus that may be coming your way until 2009.
* If you own an interest in a partnership or S-corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
* If you expect to owe state and local income taxes when you file your return next year, consider increasing withholding of state taxes or make estimated payments before year-end to pull the deduction of those taxes into 2008.
* Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.
* Estimate the effect of any year-end planning moves on the Alternative Minimum Tax (AMT) for 2008, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. In some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
* If you are thinking of making energy saving improvements to your home, postpone your move until 2009. A credit of up to $500 may be available for such improvements if made next year but not this year.
* Substantial tax credits are available for installing energy generating equipment such as solar electric panels or solar hot water heaters to your home. The credits are available whether you spend the money this year or next, but if you're installing solar and will be spending more than $6,667, the credit will be larger for expenses made in 2009 rather than 2008.
* If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if the vehicle you choose is eligible for the credit, and, if so, purchase it before year-end.
* Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option for assets bought and placed in service this year; the maximum expensing amount will drop to $133,000 for assets bought and placed in service in 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus write-off generally won't be available next year although some exceptions apply.
* You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
* If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
* You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $12,000 in 2008 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
* If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
* If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.
* Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
* You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
These are just some of the year-end steps you can take to SAVE on your 2008 taxes. Again, contact us and we’ll help you tailor a plan that will work best for you.