TIMING IS EVERYTHING IN COMEDY…AND TAXES
The general rule in tax planning is, later is better. So if you can
defer collection of taxable income to 2009, do it, say by slowing down
invoicing or collections in your business. If you can accelerate
deductions to 2008, that’s a good idea too. Business equipment and build
out is entitled to extra write-offs this year, so if you need it,
consider getting it by year end. There are some important caveats: if
you expect tax rates to be higher next year (unlikely, based on the
things the incoming Administration is saying), or if you expect to be in
a higher tax bracket next year, deferral probably does NOT make sense.
And stuffing checks in the drawer won’t work; the IRS says you must
count as income money that you control, even if it isn’t in the bank
yet. Credit card purchases DO count for 2008, if they hit your account
this year. Even if the statement comes next year and is paid over time,
the purchase is still considered complete in the year it posts.
A HAPPY, HEALTHY BUNCH
Some deductions are only allowed above certain thresholds. For example,
medical expenses are only allowed to the extent they exceed 7.5% of your
adjusted gross income (“AGI”). It can be hard for generally-healthy
taxpayers to get over this hurdle. Say you make about $100,000. To be
deductible, your medical expenses would have to exceed $7,500. By
bunching payments into a single year, they can sometimes generate a
valuable write off. If you are looking at extensive dental work, for
example, you could pay your dentist in advance for an entire course of
treatment, if doing so, when combined with other medical deductions like
co-pays, prescriptions, medical travel and parking, eye care and the
like will get you over this hump. If you are subject to Alternative
Minimum Tax (the dreaded “AMT”), the threshold is 10% of AGI…
CONVERT REGULAR IRA TO ROTH – IN A DOWN MARKET, IT’S
CHEAPER
Roth IRAs are the bomb. They offer taxpayer-friendly features that put
most other types of retirement account in the shade. If you have another
type of account, like a regular IRA, you can convert it to a Roth so
long as your adjusted gross income, not counting any conversion, is
under $100,000. You pay tax when you convert a regular IRA to a Roth,
just as if you had withdrawn the money from the regular IRA. But any
growth or income in the account thereafter is permanently tax free. And
if your IRA account is down, the cost of converting will be down as
well.
Example: Tiny Tim has a traditional IRA that he funded with deductible
contributions. It was worth $10,000 at the height of the market, but now
is worth only $6,000. If his other income is under $100,000, Tim can
convert his IRA to a Roth. He will have to pay tax on the $6,000, but
any growth thereafter will be completely free of tax – assuming he
satisfies various Roth requirements that most folks easily meet. If he
lives a long time, he will save a huge amount of tax. And even if he
doesn’t, a Roth IRA has desirable features if it becomes part of his
estate.
MAKE GIFTS OF STOCK WHEN THE MARKET IS LOW
A taxpayer can give up to $12,000 a year in 2008 in property to anyone
he or she wishes, without gift tax implications. In a down market,
$12,000 means more shares of stocks, or a larger interest in real
estate. Make sure to document the gift appropriately.
WORTHLESS STOCKS CAN BE WORTHY
Stocks of companies like Fannie Mae have lost almost all their value.
But they are not worthless. If you want to take a 2008 loss on these
losers, sell them by year end in a taxable account. (Losses in your IRA
or 401k are not deductible.) Your broker may be willing to buy them from
you. Other investments may truly be worthless. If this is the case, you
can take a loss on them in the year their worthlessness can be fixed.
That is not always easy, which is why a sale, even for pennies, is
better for tax purposes, if possible. Otherwise, make sure to collect
what evidence you can that shows the worthlessness of any investment on
which you would like to take a loss.
LOST IN THE WASH
Let’s say a stock in your taxable account has gone down in value. You
can sell it, and take a deductible loss. But if you buy the same stock
within 30 days before or after such a loss-making sale, your loss is not
allowed right away. This is called a “wash sale”, because your purchase
washes out your sale. So just wait 30 days, or buy a similar, but not
identical stock. For example, perhaps you own GM stock, which is way
down. You wish to maintain an investment in auto companies, but you
don’t want to forfeit a chance at a 2008 loss due to the wash sale rule.
You could sell GM shares and immediately buy Toyota stock, without
creating a wash sale. Or you could own low-cost index shares, like me,
in which case you wouldn’t care quite so much about this or that sector.
An index investor could still sell, say, a Vanguard index and buy a
Fidelity index if she or he wanted to take a tax loss.
LAST MINUTE NEWS: CONGRESS SUSPENDS REQUIRED MINIMUM
DISTRIBUTIONS FOR 2009 (NOT 2008)
Folks over 70 ½ must take at least some money from their IRAs and other
retirement accounts by year end. They pay tax on the money when they
take it out. If they fail to do withdraw this minimum amount (called an
“RMD”), hefty penalties apply. The RMD is based on the value of the
accounts at the end of the prior year. A brand-new law suspends the RMD
requirement for 2009. 2008 withdrawals still must happen, unfortunately.
They are based on account values at 12 31 2007.
SAVE THE WORLD – BUT GET A RECEIPT
Charities are reeling from donations that have fallen with the falling
economy. If you help out a charity this year, you can earn valuable tax
breaks. Recent changes in the rules mean you MUST have a written
acknowledgment from the charity for donations of money in excess of $250
in order to claim a deduction. A canceled check alone will not do the
trick. Churches and the like have improved their record keeping to help
donors meet this requirement; ask for your record of giving before tax
time.
HOME BUYER INCENTIVE – UNCLE SAM WILL FRONT YOU SOME
CASH FOR A HOUSE
If you buy a principal residence (not a vacation home) between April 10
2008 and June 30 2009, and if your adjusted gross income is under
$95,000 if single ($175,000 if married filing jointly), you can get an
interest-free loan of up to $7,500 from the federal government by way of
a big new tax credit that will fatten or create a refund for you. You
repay the loan by having $500 added to your tax for 15 years starting
two years after the year you purchase the house. You have to pay back
any credit in a year where you sell the house at a profit or stop using
it as your principal residence. If you buy a home in 2009 that
qualifies, we can help you file an amended 2008 return, so you get a
refund right away to help with the purchase. Zero-percent financing for
a down payment is very unusual these days, so this is something
taxpayers should use if they can. See you at the housewarming!