Year End Tax Planning Tips
1.
Maximize capital losses to offset any gains. Be careful about using short-term losses to offset long-term gains because of the differences in tax rates. The long-term gain rate is 15%.
2.
Consider converting investment income, specifically interest income, into qualified dividend income. Qualified dividend income will be taxed at the capital gain rate of only 15%.
3.
Consider shifting income into 2008, if your 2007 income will disqualify you for the child or education credits.
A.
The child credit ($1,000) phases out for married couples with an AGI of $110,000 ($75,000 for single individuals).
B.
The Hope education credit (maximum credit of $1,500 on first $2,000 of tuition) phases out for married couples with an AGI between $94,000 and $114,000 ($47,000 and $57,000 for single individuals). The Lifetime education credit of $2,000 (20% of the first $5,000 of tuition cost) has the same income phase out rules. In addition to education credits, an education deduction is available up to $4,000. The income phase out for this deduction is $130,000 for married couples.
4.
Maximize your 2007 retirement account (401k, SEP, IRA, ROTH) contributions.
Remember non-working spouses can also contribute to an IRA. The maximum 401K contribution is $15,500; IRA and ROTH - $4,000; SEP IRA limit is 25% of net income. Individuals over 50 years of age, are eligible for special “catch up” provisions which allow for additional contributions of $5,000 to a 401K and $500 for IRA’s. The 2008 limits for 401K and IRA’s are the same as 2007.
Remember non-working spouses can also contribute to an IRA. The maximum 401K contribution is $15,500; IRA and ROTH - $4,000; SEP IRA limit is 25% of net income. Individuals over 50 years of age, are eligible for special “catch up” provisions which allow for additional contributions of $5,000 to a 401K and $500 for IRA’s. The 2008 limits for 401K and IRA’s are the same as 2007.
5.
Maximize your 2007 tax write-offs by paying them before December 31, 2007.
A.
Prepay any significant state tax balances.
B.
Prepay real estate taxes.
C.
Pay the January 2008 mortgage payment early.
D.
Make non-cash contributions (Goodwill, Salvation Army). Get a receipt!
E.
Contribute appreciated stock to a charity. Your deduction is the FMV of the stock and there are no capital gains.
F.
Use a credit card to prepay any deductions.
G.
Purchase any business equipment or automobiles for a half-year depreciation deduction.
H.
Be careful that additional deductions do not create an alternative minimum tax (AMT) problem.
6.
Consider converting your traditional IRA’s to a Roth IRA before December 31, 2007 if your AGI will not exceed $100,000. Additionally, a nondeductible contribution of $4,000 may be made if your AGI will not exceed $166,000 if filing jointly ($114,000 for other filers).
7.
For estate planning purposes, complete all gifts (up to $12,000) before the end of the year.
8.
Consider a Section 529 Education plan for your child’s education savings. The earnings are tax deferred and the income is tax free if used for educational purposes when withdrawn. Additionally, up to $2,500 of educational loan interest is deductible for 2007. The income phase out limits is $105,000 to $135,000 for the interest deduction for married couples.
9.
Be careful with regard to marriage or divorce decisions before the end of the year.
10.
If you provide more than one half of the support for an individual, you may be able to claim that person as a dependent on your return, provided their income does not exceed $3,200.
11.
Sign up before the year-end with your employer for pretax spending plan deductions for 2008. These include medical savings plan and dependent care savings plans.
12.
For automobile usage, the standard mileage deduction was 48.5 cents per mile during 2007, the 2008 rate has not yet been announced.