A Few of Our Favorite Things
Whenever you talk to a tax expert, you probably hear some "favorite tax tips." You find they are valuable, share them with your neighbor, and your mother, and your administrative assistant, and your postal carrier, and on and on. After all, why should great ideas be kept secret! There is GOOD NEWS, and it's time to share it!!
As you prepare for the end of 2007, please consider some of these "Favorite Tax Tips" from DMLO tax professionals. There are more, but we can't print them all in one article.
Take advantage of these ideas. Share them, please! And be sure to call us if you have questions.
Favorite Tax Tips:
TIP: Do some AMT tax planning. If you are NOT subject to AMT and you have had an extraordinary item of income during the year, consider paying any expected state income tax balances due prior to year end. This not only accelerates the deduction into the current year, but might avoid an AMT situation in the following year when income decreases. If you ARE subject to AMT, don't prepay state taxes. These taxes are not deductible for AMT purposes.
TIP: Exercise "in the money" incentive stock options at least to the point of AMT tax being due.
TIP: Consider making deductible charitable contributions for next year in advance.
TIP: Review your portfolio now for any securities that are in a loss position. Sell them before year-end to offset other capital gains. After offsetting your gains, you may be able to deduct an additional $3,000 in losses.
TIP: If self-employed, don't forget to establish a retirement account before year-end even if you don't fund it until you file your tax return.
TIP: Review your business's pension plan and make sure to set up the right plan to maximize your 2007 tax deductions (plans such as Defined Benefit Plans and 401(k) pension plans). These plans must be set up by December 31st.
TIP: Contribute to a Qualified Tuition Program (Section 529 Plan) for your child or grandchild. A taxpayer is able to fund a Section 529 Plan with up to $60,000 in 2007 without any gift tax consequences (provided no other gifts have been made to that individual in 2007). Distributions of the earnings of the plan are tax free when used for qualified higher education expenditures.
TIP: Businesses should start thinking about strategies to defer income to the following year (2008) and accelerate expenses into this year. By doing this they are deferring the payment of taxes from April 2008 to April 2009.
Cash basis taxpayers looking to reduce their income can pay all deductible expenses prior to year end. Alternatively, cash basis taxpayers may be able to "defer" receipt of income to reduce their income.
Cash basis taxpayers looking to increase income should do just the opposite. They should defer expenses and accelerate their income.
TIP: Help minimize underpayment of estimated tax penalties: If you find you have underpaid your estimated taxes near year end and you receive wages from an employer, have your withholdings adjusted to help compensate for this underpayment. If you write a check for the underpaid estimated taxes, the IRS considers the date your check is received as the date paid but payroll tax withholdings are viewed as paid ratably throughout the year.
TIP: Collect your tax data as it arrives and you won't have to search for it later. Start an envelope or file now. Whenever you received a year end brokerage statement, put it in the file. Add all those "Important Tax Document Enclosed" envelopes as they come in. You should have them all by the end of January. Find the tax notice on your auto and add it now. When you purchase an auto, sign a new auto lease, or buy or sell your home, add the closing statement to the envelope. When it's time to see your accountant, you will have most of your preparation done.
TIP: Make sure you max out on your 401(k) plan. You can accelerate your contributions to max out at $15,500 and don't forget about the $5,000 catch up contribution if you are over 50 years old.
TIP: Because of a change in the Kiddie tax law, it may be advantageous for your 19 – 23 year old student children to sell securities with gains before 12/31 to take advantage of the 5% bracket before they are returned to the tax status of "kiddies" and again subject to your tax rate. Each situation is unique so share yours with us to see if your household will benefit!
TIP: Help your child (or grandchild) to be a millionaire at retirement. Open an IRA for them as soon as they start earning money and put $3,000 per year (or more if you can afford it – but watch your limits) in the account for 10 years. Then stop. It will keep growing tax free until that child or grandchild retires. For instance, $3,000 a year deposited from 20 years old to 30 years old will grow to $1.2 million by retirement at age 65 assuming a 9% average earning rate.
(Tax Tips in this article contributed by Larry Bailey, Sara Gould, Bea Rosenberg, Dick Peterson, Cyndy Holahan, Madison Bennett, Jeff Calderon, Marilyn Owens.)
Full Newsletter
