Year-end Tax Planning Ideas
December 10, 2008
Dear Client and/or Friend of
the Firm:
As the end of the year
approaches, it is a good time to think of planning moves that will help lower
your tax bill this year and possibly the next. Factors that compound the
challenge include the stock market's swoon, the difficult economic climate
we're in right now, and the strong possibility that there will be tax changes
in the works next year. In fact, there might even be another economic stimulus
package carrying tax changes enacted before the end of this year.
The indisputably good news
we are certain of is that Congress has acted to “patch” the AMT problem for
2008, has retroactively reinstated a number of tax breaks (such as the option
to deduct state and local general sales tax instead of state and local income tax
and the above-the-line deduction for higher education expenses), and has
created new tax breaks that go into effect for the 2008 tax year (including a
tax credit for first-time homebuyers, a nonitemizers' deduction for state and
local property tax and a nonitemizers' deduction for certain disaster losses).
For 2008, businesses enjoy tax breaks such as a beefed-up expensing option and
a 50% bonus first-year depreciation writeoff for most machinery and equipment
placed into service this year and a reinstated research credit.
We have compiled a checklist
of actions based on current tax rules that may help you save tax dollars if you
act before year-end. Not all actions will apply in your particular situation,
but you will likely benefit from many of them. We can narrow down the specific
actions that you can take once we meet with you to tailor a particular plan. In
the meantime, please review the following list and contact us at your earliest
convenience so that we can advise you on which tax-saving moves to make:
- Realize losses on stock
while substantially preserving your investment position. There are several
ways this can be done. For example, you can sell the original holding,
then buy back the same securities at least 31 days later. It may be
advisable for us to meet to discuss year-end trades you should consider
making.
- Postpone income until 2009
and accelerate deductions into 2008 to lower your 2008 tax bill. This
strategy may enable you to claim larger deductions, credits, and other tax
breaks for 2008 that are phased out over varying levels of adjusted gross
income (AGI). These include IRA and Roth IRA contributions, conversions of
regular IRAs to Roth IRAs, child credits, higher education tax credits,
the above-the-line deduction for higher-education expenses, and deductions
for student loan interest. Postponing income also is desirable for those
taxpayers who anticipate being in a lower tax bracket next year due to
changed financial circumstances. Note, however, that in some cases, it may
pay to actually accelerate income into 2008. For example, this may be the
case where a person's marginal tax rate is much lower this year than it
will be next year.
- If you believe a Roth IRA
is better than a traditional IRA, and want to remain in the market for the
long term, consider converting traditional-IRA money invested in
beaten-down stocks (or mutual funds) into Roth IRAs if eligible to do so.
Keep in mind, however, that such a conversion will increase your adjusted
gross income for 2008.
- It may be advantageous to
try to arrange with your employer 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.
- Consider using a credit
card to prepay expenses that can generate deductions for this year.
- If you expect to owe state
and local income taxes when you file your return next year, pay estimated
tax payments of state and local taxes 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.
- 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.
- 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. This includes the deduction
for state property taxes on your residence, state income taxes (or state
sales tax if you elect this deduction option), miscellaneous itemized
deductions, and personal exemption deductions. Other deductions, such as
for medical expenses, are calculated in a more restrictive way for AMT
purposes than for regular tax purposes. As a result, 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, such as putting in extra
insulation or installing energy saving windows, 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 electric property, 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 it's
eligible for the credit, and, if so, purchase it before year-end.
- You may want to pay
contested taxes to be able to deduct them this year while continuing to
contest them next year.
- 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 next year (higher expensing amounts apply to certain
specialized assets).
- Businesses also should
consider making expenditures that qualify for 50% bonus first year
depreciation if bought and placed in service this year. This bonus
writeoff generally won't be available next year (some exceptions apply,
such as for businesses affected by Presidentially declared disasters).
- 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.
- If you are receiving
Social Security benefits, there are a number of steps you can take to
reduce or eliminate tax on your benefits.
- Consider extending your
subscriptions to professional journals, paying union or professional dues,
enrolling in (and paying tuition for) job-related courses, etc., to bunch
into 2008 miscellaneous itemized deductions subject to the 2%-of-AGI
floor.
- 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.
- 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 you
can set aside amounts to get tax-free reimbursements for over-the-counter
drugs, such as aspirin and antacids.
- If you become eligible to
make health savings account (HSA) contributions in December of this year,
you can make a full year's worth of deductible HSA contributions for 2008.
These are just some of the
year-end steps that can be taken to save taxes. Again, by contacting us, we can
tailor a particular plan that will work best for you.
Sincerely,
MONTANO & ASSOCIATES
New tax law – October 3, 2008
Dear
Client
and/or friend of the Firm:
There have been several recent
tax law changes affecting individuals that were enacted Oct. 3,
2008
.
Most of them apply retroactively. These changes, together with several other
popular tax benefits, were included in the controversial financial bail-out
legislation to win support from reluctant lawmakers.
Although many of the changes
will have a modest impact on a relatively small group of taxpayers, they are
described below for your general information, as well as their potential
applicability. The changes in the alternative minimum tax, however, are likely
to have a significant positive impact on your
2008
Federal tax picture. These changes are discussed immediately below.
Alternative Minimum
Tax Relief
Changes in the alternative
minimum tax (“AMT”) rules will provide relief for millions of individuals. The
first change is an increase in the exemption amounts that are subtracted from
an individual's “alternative minimum taxable income” to determine the taxable
amount (if any). The exemption amounts for
2008
are $69,950 for joint filers, $46,200 for single filers, and $34,975 for
married taxpayers filing separate returns. These amounts, although only
slightly higher than in 2007, are substantially higher than the exemption
amounts originally scheduled to apply in
2008
.
The second broadly
applicable AMT change permits taxpayers to use all their “nonrefundable
personal credits” (e.g., the dependent care credit) in full to offset both the
regular tax and the AMT in
2008
.
Before this change, which represents a one-year extension of a rule that had
expired in 2007, most of the nonrefundable personal credits could not be used
to offset the AMT.
Other changes in the new law
are aimed at a narrower but nevertheless substantial group of taxpayers. These
are the many employees who paid AMT as a result of exercising incentive stock
options (“ISOs”), then later suffered losses on selling the stock after its
value had declined sharply. This scenario is often called the “phantom income”
problem because tax is paid on gains that never materialize.
The new law addresses this
problem in two ways. First, it liberalizes a rule, which originally took effect
in 2007, designed to allow taxpayers to recover some of the benefit of
previously unused AMT credits over a five-year period. The new law provides
additional relief by eliminating a phase-out provision in the original rule and
reducing the recovery period to two years.
Second, the new law forgives
any tax, including interest and penalties, outstanding on October 3,
2008
(date of enactment), if attributable to the minimum tax adjustment for ISOs.
Second, for taxpayers who have already paid any interest and penalties that
would have been abated under this new rule, such interest and penalties can be
used—half in
2008
and half in 2009—to increase the “AMT refundable credit amount” and the minimum
tax credit.
Another AMT change may
benefit energy-conscious taxpayers. Beginning in
2008
,
the credit for “energy efficient residential property” can be used to offset
the AMT.
Retroactive Extensions
of Other Individual Provisions
The new law extends
through 2009 several provisions that had expired at the end of 2007.
These include:
• State and Local Sales Tax Deduction. Allows taxpayers to
use state and local sales taxes as itemized deductions in lieu of state income
taxes
• Deduction for Qualified Tuition and Related Expenses.
Allows an “above-the-line” deduction (i.e., not part of itemized deductions)
for certain higher education expenses. The maximum deduction is $4,000 or
$2,000, depending on the taxpayer's adjusted gross income (AGI). No deduction
is allowed for single
filers
having AGI above $80,000 or for joint filers having AGI above $160,000.
• Deduction for Classroom Expenses. Allows an
“above-the-line” deduction (i.e., not part of itemized deductions) of up to
$250 for out-of-pocket expenses of teachers and other educators in grades K-12
for items such as books, supplies, and computer equipment used in the
classroom.
• Tax-free IRA Distributions to Charity. Permits direct
distributions to charity of up to $100,000 from a traditional or Roth IRA
maintained for an individual whose has reached age 701/2.
Ordinarily, such distributions would be taxable to the individual, who would
not be able to offset the income fully because of the percentage limitations on
charitable contribution deductions.
• Special Provisions Concerning Mutual Funds. The new law
extends three rules primarily affecting nonresidents who are not U.S. citizens. One concerns “interest-related” dividends from mutual funds. The second is a
“look-through” rule for determining the taxability of mutual fund assets for
estate tax purposes. The third concerns the treatment of mutual funds for
purposes of the Foreign Investment in Real Property Tax Act (“FIRPTA”).
Credit for Residential
Energy Efficient Property Extended and Expanded
The new law extends through
2016 the credit for “residential energy efficient property,” which was
scheduled to expire at the end of
2008
.
Also, as noted above, beginning in
2008
,
taxpayers can use the credit against the alternative minimum tax (“AMT”).
Moreover, the new law retroactively adds two new types of qualifying property,
and, beginning after
2008
,
removes the credit limit for “qualified solar electric property.”
Previously, the credit was
based on expenditures for three defined types of qualifying property: qualified
solar electric property, qualified solar water heating property, and qualified
fuel cell property. The new law adds two more categories: qualified small wind
energy property and qualified geothermal heat pump property.
The credit for each type of
property is 30% of qualifying expenditures, subject to a dollar limit for each.
These limits are as follows:
•
$2,000 for qualified solar electric property expenditures in
2008
;
the limit is removed after
2008
.
•
$2,000 for qualified solar water heating property expenditures.
•
$2,000 for qualified geothermal heat pump property expenditures.
•
$500 for each half kilowatt of capacity (not to exceed $4,000) for qualified
small wind energy property expenditures.
•
$500 for each half kilowatt of capacity for qualified fuel cell property
expenditures.
Earned Income Threshold
for Child Tax Credit Refundability
The new law reduces the
earned income threshold for determining the refundability of the child tax
credit for
2008
to $8,500 (from $12,050).
Real Property Tax
Deduction for Nonitemizers
In
2008
,
individuals who do not itemize their deductions may include, as part of the
standard deduction, real property taxes of up to $500 ($1,000 for joint
filers). The new law extends this rule through 2009.
* * *
We hope the above
information is useful to you. Please feel free to contact our office if you
would like additional information on the new law or if you would like to
discuss your individual tax or business situation in more detail.
Sincerely
MONTANO & ASSOCIATES
July 9, 2008
IRS RAISES STANDARD MILEAGE RATES
With gas prices soaring, the IRS has announced an
increase in the standard mileage rates that taxpayers
can use to deduct the cost of driving for business,
medical services, or moving.
BUSINESS. Effective for driving from July 1 through
December 31, 2008, the standard mileage rate for
business driving has been increased to 58.5¢ per mile.
The rate for business miles driven from January 1
through June 30, 2008, remains at the previous rate of
50.5¢ a mile.
MEDICAL AND MOVING. The IRS also increased the
deductible rate for medical and moving mileage for the
last six months of 2008 to 27¢ a mile. For the first six
months of 2008, the rate remains at 19¢ a mile.
CHARITABLE. Note that the IRS made no change in the
mileage rate for driving in conjunction with charitable
activities. That rate is set by law and remains at 14¢
a mile.
The standard mileage rates provide taxpayers with an
IRS-approved recordkeeping shortcut for deducting
expenses for business, medical, and moving driving. The
rates are adjusted annually based on operating costs
for vehicles. When costs rise dramatically during the
year, the IRS considers a midyear change.
The new mileage rates are available to many - but not
all - drivers. Give us a call if you have questions or
need details on how the changes affect your situation.
We hope this information is helpful
to you. If you have any questions or would like more details about this, please
do not hesitate to call.
Sincerely,
MONTANO & ASSOCIATES
February 29, 2008
Dear Client,
You've probably heard that the
government is going to be sending rebate checks to most Americans in an effort
to stimulate the economy. This letter explains, among other items, who gets
rebates, how they are calculated, how higher income can reduce or eliminate a
rebate, and what, if anything extra, you'll need to do to get one.
Who gets rebates?
Only individuals get rebates.
Business entities don't get them. Nor do estates and trusts. But there are
other new tax breaks for businesses. Not all individuals, however, get rebates.
You don't get one if you are or can be claimed as someone else's dependent.
Also, nonresident aliens and illegal immigrants don't get rebates.
Does that mean all other individuals get rebates?
No, to get a rebate, in general, for
2007, you must either (1) owe tax as computed in a special way or (2) have at
least $3,000 of qualifying income—earned income generally, social
security benefits, and veterans' disability payments (including payments to survivors
of disabled veterans).
How much do you get?
A single person with no qualifying
children gets a maximum rebate of $600 or a minimum rebate of $300. A married
couple filing jointly with no qualifying children gets a maximum rebate of
$1,200 or a minimum rebate of $600. To get the maximum, your 2007 tax (figured
in a special way) must be $600 or more for a single person and $1,200 or more
for a married couple filing jointly. To get the minimum, you must have at least
$3,000 of qualifying income (explained above) or owe tax (figured in a special
way) of at least $1. Your rebate amount will fall in between the minimum and
maximum if your tax is more than $300 but less than the maximum rebate for your
filing status. In that case, your rebate will be equal to your tax. For
example, you are single and your tax is $500, you will get a rebate of $500.
Increased amount for those with one or more qualifying
children.
Anyone who qualifies for a rebate in
any amount gets an additional $300 for each qualifying child. To qualify, a
child must be under the age of 17, live with you for more than half of the
year, and be your son, daughter, stepson, stepdaughter, brother, sister,
stepbrother, stepsister, or descendant of any such individual. In addition, the
child must not have provided more than half of his or her own support. Thus,
for example, a married couple filing jointly with two qualifying children could
be eligible for a maximum rebate of $1,800.
How does higher income affect a potential rebate?
The amount of the rebate (both the
basic and the child's amount) is reduced by 5% of a taxpayer's adjusted gross
income (AGI) above $75,000 ($150,000 for joint returns). For example, a married
couple filing jointly with no children has AGI of $160,000, and net tax liability
of over $1,200. Their rebate is $700: [$1,200 basic rebate - $500 phaseout (i.e., 5% × ($160,000 - $150,000)].
What do I have to do to get the rebate check?
Nothing. The IRS will automatically figure
your rebate based on your 2007 tax return that is due April 15, 2008. It will start sending
rebate checks out in May for those who file before then.
What if you don't have to file?
Here's where it gets tricky. Many
people who normally don't have to file a return will have to do so in order to
get a rebate check. For example, an individual whose only income is $3,000 of
earnings normally would not be required to file a return. Likewise, an
individual whose entire income consists of $8,000 of social security benefits
normally would not have to file a return. These individuals should file either
Form 1040 or Form 1040A to show the IRS that they meet the $3,000 qualifying
income threshold. They will not owe any income tax as a result of filing. They
should enter on Line 20a of Form 1040 or line 14a of Form 1040A the following
benefits in any combination:
- Social security benefits reported on the 2007
Form 1099-SSA, which should have been received in January 2008.
- Railroad retirement benefits reported on the
2007 Form 1099-RRB, which should have been received in January 2008.
- The sum of veterans' disability compensation,
pension or survivors' benefits received from the Department of Veterans'
Affairs in 2007.
Do rebates affect 2008 taxes?
The rebate that the IRS will send
you after you file your 2007 return usually won't affect your 2008 taxes on the
return that you file in 2009. However, it can. When you do your 2008 taxes, you
will figure what the rebate would have been based on your 2008 taxes. It could
be higher or lower than the check that you received from the IRS in 2007. If it
is higher, you will get a credit against your 2008 taxes for the difference. It
if is lower, you won't have to pay the difference back.
We hope this information is helpful
to you. If you have any questions or would like more details about this, please
do not hesitate to call.
Sincerely,
MONTANO & ASSOCIATES