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November, 2008 Tax Tip

2008 Year End Tax Planning


As we enter November in a very troubled worldwide financial situation and much uncertainty about the future, one thing is certain.  2008 and 2009 taxes will or should be extremely important for you to consider.  This has been made abundantly clear during the Presidential campaigns.  I have long stated that perhaps the best way to obtain cash is to prevent tax erosion of the cash you already have through effective tax planning.  Keep in mind that the window of opportunity for most tax-saving strategies closes on December 31.


The importance of tax planning at this time of year is basically threefold:  1) to formulate an overall tax reduction plan which takes into account both 2008 and 2009,  2) to implement strategies, prior to December 31, 2008, to minimize 2008 and 2009 federal and state taxes, and  3) to obtain a snapshot of your 2008 federal and state tax balances or refunds.  This avoids unpleasant surprises when you receive your prepared returns and also allows several months to plan for payments.  If refunds are indicated, you may be able to reduce your fourth quarter estimated tax payment.


Even with the bad economic news, there have been some tax law changes this year that could benefit many of you.  These will be discussed in this month’s accompanying newsletter on the Emergency Economic Stabilization Act of 2008.


Timing is to tax planning what location is to real estate (yes, that still does matter).  There are two important decisions that must be made: whether you should attempt to defer income from 2008 to 2009 and whether you should pay deductible expenses in 2008, rather than 2009.  While your relative tax brackets are a major factor in making these decisions, there are other considerations, such as the alternative minimum tax (“AMT”) that must be taken into account.


If it is determined that it would in your best tax interest to defer income to 2009, some ways this may be accomplished include asking your employer to pay your year-end bonus in 2009, rather than 2008; maximizing your 2008 contributions to your tax-deferred retirement plan, such as 401(k); and, if you are self-employed, delaying customer or client billings so that payment won’t be received until 2009.


If it would be prudent to pay deductible expenses in 2008, a few of the items to consider include:  1) making your January, 2009 mortgage payment in December (if you do this, contact your lender to find out the latest date it can be paid in order for the interest to be included on your 2008 form 1098 and follow up by verifying that it was received by that date);  2) if you are making quarterly estimated state income tax payments, making the fourth quarter payment (normally due January 15, 2009) by December 31;  3) if you are an employee, having your payroll department increase the taxes withheld from your December paychecks to cover any underpayments of estimated tax you may be facing for 2008 to avoid or minimize potential penalties;  4) paying your real estate tax installment due in the spring of 2009 by December 31;  5) fulfilling charitable pledges and making other charitable contributions by December 31, rather than in 2009;  6) making payments of deductible expenses on your bank credit card (Visa, Mastercard, Discover) by December 31.  These are deductible in the year of charge, not the year of payment. 


CAUTION:  Avoid paying state income or real estate taxes in 2008 if you are projected to be in the AMT, as these taxes are not deductible for AMT purposes.   Also, there are much more stringent rules for substantiation of charitable deductions that now apply.  Be sure to discuss these with your tax professional.


Believe it or not, some of you may have owned stocks for so long you actually sold them at a gain or have a paper gain on them.  If you are one of the lucky ones, you may wish to consider selling investments that have paper losses and using them to offset your gains.  For taxpayers in the 10 or 15% tax brackets, most capital gains and dividends are not taxed for the years 2008 through 2010.  The calculations can be somewhat tricky so, again, you should discuss it with your tax professional.


In the area of retirement plans, if you are employed, consider a traditional IRA ($5,000 contribution limit - $6,000 if age 50 or over); a Roth IRA (same limits as a traditional IRA) except contributions are not deductible but later distributions are not taxable; an employer sponsored 401(k) plan which allows you to contribute pretax funds up to $15,500 ($20,500, if age 50 or older), thereby reducing your 2008 income.  Note that 2008 contributions to IRA’s can be made up to April 15, 2009.


If you are self-employed you can establish a retirement plan before year end including a “solo 401(k)” plan, a SEP plan (which is the only plan that can be established and funded after the end of the year) or a SIMPLE plan.   Other self-employed strategies to keep in mind in your planning include acquiring and placing equipment into service by December 31 to take advantage of the immediate Sec. 179 write-off of up to $250,000 (plus 50% bonus depreciation on the balance);  establishing a medical insurance plan; employing your minor children to perform administrative tasks in your business during the holidays; and, if you qualify, deducting a home office.




The foregoing discussion includes only some of the more common tax strategies involved in year-end planning.  There are many others, several of which may be important to consider implementing in your situation.  It is strongly recommended that you consult a knowledgeable tax professional to assist you in the analysis.  For many years I have worked with clients to present a “tailor-made” plan to fit their unique tax situations.




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