Year-End Tax Tips and Planning Strategies

The end of the year is traditionally a time to celebrate the holidays, and your 2008 taxes may be the farthest thing from your mind.  However, with a few exceptions, it is your last opportunity to alter the results of your 2008 taxes.  The following are some of the many possible strategies that can be employed before year’s end.

• Required Minimum Distributions (RMD) — If you are 70½ or older, make sure that the minimum distribution amount is withdrawn from your IRA or other qualified plans to avoid the 50% penalty for under-withdrawals.  

• IRA and Qualified Plan Withdrawals — If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawal with respect to your tax bracket.  It may be tax-effective to actually withdraw more than the minimum required by law.  If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of this income.

• Avoid Underpayment Penalties — Taxpayers are expected to pay their taxes during the year through withholding and/or the payment of estimated taxes.  If you have not paid enough and do not meet one of the exceptions, you could be subject to an underpayment penalty, along with an unpleasant tax bill when the tax return is filed.  Year-end increased withholding and estimates can mitigate those penalties. 

• Capital Gains and Losses — If you have any capital gains or losses from sales of stock or other capital assets, or you have stock or other capital assets that are ripe for sale, it may be advisable to meet and discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.

• Zero Tax Rate — If you or a family member are thinking of selling appreciated stock or other capital assets, and your (or their) income isn't taxed at a rate higher than 15%, you can take advantage of the zero tax rate available in 2008.

• Expecting a Year-End Bonus — It may be advantageous to arrange with your employer to defer a bonus until after the end of the year, thereby deferring the taxes on it until 2009.

• Fuel-Efficient Vehicle — If you are thinking of buying a hybrid or advanced lean-burn vehicle eligible for a tax credit,(1) be sure to confirm that the particular model still qualifies for the credit.  

• Bunch Deductions — If you are marginally able to itemize each year, it may be appropriate to “bunch” deductions in one year and then claim the standard deduction in the alternate year. 

• State Estimated Tax Payments — Although the deadline for most states is January 15, 2009, for the fourth quarter 2008 state estimated tax payment, if that payment is made before the end of December 2008, the payment will count as a tax deduction(1) on federal Schedule A for 2008.   

• Property Taxes — Generally, your property taxes(1) are billed in installments, and that is how most people pay them.  However, the tax can be paid all at once if it provides a greater tax benefit for the current year.

• Charitable Contributions — If you have been planning to contribute used clothing and household goods to a charity, doing so before the year’s end can increase your itemized deductions.  But keep in mind that under the stringent rules for charitable donations, the items must generally be in good or better condition, and your contribution will need to be substantiated. 

• Annual Gift Tax Exclusion — 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.

• Roth IRA Conversions — If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost.  Roth IRAs provide the benefit of tax-free income for retirement.

• Education Credits — If you qualify for one of the higher education tax credits and have not paid enough tuition during the year to achieve the maximum credit, the law allows you to prepay tuition for an academic period beginning within the first three months of the next year and claim the tuition for the current year’s credit.

If you would like to discuss other possible strategies or how any of the ones listed above apply to you, please call this office.

(1)  Caution: These credits and/or deductions do not benefit taxpayers who are subject to the alternative minimum tax (AMT). 

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