Tax Tip for Year-end 2008

The 4^th quarter is the ideal time to consider recent tax law changes and to discuss year-end tax planning strategies.

Tax Law Changes. The lawmakers in Washington have kept tax professionals busy with three major tax bills during 2008. The changes are too voluminous for inclusion in this newsletter. Please visit the Tax Tip page of our website, www.patinella.com, for important details.

1)      February ‘08 - Economic Stimulus Act of 2008.

2)      August ’08 - Housing Assistance Act of 2008.

3)      October ’08 - Emergency Economic Stabilization Act of 2008.  

Year-end Planning. Factors that compound the challenge of year-end planning this year 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. Some year-end tax planning strategies to consider:

-         Depreciation: Consider purchasing before year-end furniture and equipment which will be used for business purposes. For 2008, IRC section 179 allows businesses to elect to expense in the year of purchase (rather than depreciate over several years) up to $250,000 of the cost of qualifying fixed assets. Note that for SUVs weighing more than 6,000 lbs and less than 14,000 lbs, IRC section 179 depreciation is limited to $25,000.

-         Postpone income until 2009 and accelerate deductions into 2008 to lower your 2008 tax bill. Postponing tax generally is a primary goal of year-end tax planning. It's particularly effective if it helps you to claim larger deductions, credits, and other tax breaks that are phased out over varying levels of adjusted gross income.

Note that while this is a traditional year-end planning strategy, for some taxpayers this might not be beneficial this year. It’s been well publicized that the incoming administration will seek to raise taxes for those individuals with taxable income in excess of $250k. For these taxpayers it might make sense to do the opposite, meaning accelerate income into 2008 and postpone deductions to 2009. Of course the challenge of planning in this environment is not currently knowing the details of the ultimate tax change. 

One opportunity for accelerating deductions that is often overlooked is to pay your anticipated Arizona tax liability before year-end, rather than waiting until you file your tax return in 2009. By paying your state tax liability prior to year-end, you accelerate into 2008 the itemized deduction for state taxes paid, rather than having to wait to claim the deduction on your 2009 tax return. 

-         Lock in capital losses. If you are holding onto stocks or mutual funds in nonqualified accounts (i.e. not a retirement account, annuity, or other tax deferred account), and have lost value since original purchase, consider selling before year-end to capture the capital losses for tax purposes. You are allowed to buy back the same securities as long as you wait at least 31 days. This strategy might come in particularly handy for mutual fund investors. It is widely expected that mutual fund investors will face a likely double whammy of negative performance, coupled with above-average taxable capital gain distributions from mutual funds. Mutual funds are required to pass through to investors capital gains that the mutual fund realizes from selling its underlying investment positions. In 2008 many mutual funds were forced to liquidate positions to meet the large number of investor redemptions.   

-         Take advantage of the Arizona School Tax Credits. Qualifying contributions made before December 31, 2008 will generate a dollar-for-dollar state tax credit as well as a federal itemized deduction for charitable contributions. Maximum donations to a qualifying private school are $500, or $1,000 if married filing jointly (MFJ). Maximum donations to a qualifying public school are $200, or $400 if MFJ. You can take advantage of both the private & public school credits in the same year.

-         Take advantage of the Arizona Charitable Tax Credit. Similar to the School Tax Credits, qualifying contributions made before year-end can generate a state tax credit and a federal itemized deduction for charitable contributions. The total available credit is $200, or $400 if MFJ. Contributions made to charities that assist the Working Poor qualify. A list of these charities appears on the ADOR website http://www.revenue.state.az.us/Refunds%20and%20Credits/certifiedcharities.pdf. The one twist to this credit is that in order to qualify, your total 2008 charitable contributions must exceed your baseline year (typically 1996) charitable contributions.

-         Starting in 2008 the state of Arizona will provide individuals with a subtraction from Arizona income for contributions to Internal Revenue Code (“IRC”) section 529 college savings plans. The subtraction is limited to $750 for single and head of household filers, and $1,500 for married couples.

-         Zero long term capital gains/qualifying dividends rate for some. An individual taxpayer's long term capital gain & qualifying dividends are taxed at a maximum federal rate of 15%. However, if they would otherwise be taxed at a rate of 15% or below if it were ordinary income, they are taxed at a zero percent rate for 2008 through 2010. 

-         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 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 (i.e. adjusted gross income less than $100k). Keep in mind, however, that such a conversion will increase your income for 2008.

-         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.

Other planning areas that we can assist with throughout the year include:

-         Stock Option Planning

-         Retirement Planning

-         Mortgage Planning

-         College Planning

-         Estate Planning

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