For most of us,
the end of the year means planning for the holidays
and holiday gatherings. Income taxes are probably
among the last things on your mind. Still, it
is the right time to be thinking about them,
because there is still time left to take actions
that will save taxes. It could possibly help
you afford just a little more holiday cheer.
Some year-end tax tips never seem to go out
of style; others are appropriate because of
changes to the tax law that may not last. So
before you get too busy with holiday arrangements,
here are some reminders of the issues that keep
recurring, as well as a rundown of the recent
changes that can affect your tax bill. 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:
• Increase
the amount you set aside for next year in your
employer's health flexible spending account
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
have any capital gains, capital gain distributions
from mutual funds, or you have stocks or other
capital assets that are ripe for sale, it may
be advisable for us to meet to 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.
• If you
are planning a gift to a charity, consider gifting
appreciated stock instead. If you gift appreciated
stock you do not pay capital gains on the appreciation,
and you get a deduction for the stock at the
appreciated value. This creates a greater tax
break.
• Maximizing
your 401k contribution will reduce taxable income
for the year.
• 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.
Losses are only allowed to the extent that owner
has basis in the entity.
• Consider
using a credit card to prepay expenses that
can generate deductions for this year, or consider
making your January 1st mortgage or real estate
tax payment at the end of December.
• If you
are thinking of buying a hybrid vehicle eligible
for a tax credit, purchase it before year-end
after confirming that the particular model still
qualifies for the credit.
• Business
clients also should consider making expenditures
that qualify for the $250,000 Section 179 property
expensing option.
• You may
want to settle an insurance or damage claim
in order to maximize your casualty loss deduction
this year.
• You may
be able to save taxes this year and next year
by applying a bunching strategy to "miscellaneous"
itemized deductions, medical expenses and other
itemized deductions.
• The tuition
and fees deduction has been extended through
2009.
• Those facing
a penalty for underpayment of estimated tax
may be able to eliminate or reduce it by increasing
their withholding.
• Self-employed
individuals should consider setting 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.
• This year,
the kiddie tax rules apply to kids under age
24 who are full time students, and any child
under the age of 19.
• 0% Tax
on Long Term Capital Gains. The portion of long
term capital gain and qualified dividend income
that would have been taxed at the 5% rate in
2007 will now be taxable at 0% through 2010.
• 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.
• Donations
of used clothing and household items must be
in good or better condition to be deductible.
We suggest keeping a list and a photo (to establish
the items condition) of the donated items. You
can still deduct individual items that appraise
for more than $500 even if they are not in good
condition. However, this will require you to
get a qualified written appraisal, which must
be attached to your return.
• All cash
donations must be substantiated by a bank record
- either a cancelled check or a copy of a cancelled
check. This means no more claiming weekly cash
donations to church. And remember that you must
get a receipt from the charity for any monetary
donation that exceeds $250.
• The IRS
extended provisions allowing for the direct
contribution to a charity from an IRA of up
to $100,000 through the end of 2009.
• If you
are age 70 ½ or older remember to make
your required minimum distribution prior to
year end.
• The IRS
continues to increase audits. The odds of getting
audited by the IRS are approximately 1 in 100.
For personal returns with income between $200,000
and $1,000,000 the chances increase to 2%, for
business returns it increases to 2.9%. For personal
returns with more than $1,000,000 in income
the chances of being audited are 9.3%. This
brings us to the very important next point;
• Record
retention: Keep copies of returns indefinitely
and the supporting documents for six years.
Records relating to real estate, including improvements,
and payroll, if for a business return, should
be kept indefinitely as well.
New for 2008 Tax Year:
• First-Time
Homebuyers Credit. Equal to the lesser of 10%
of the home's purchase price or $7,500. The
credit is repaid to the government over the
next 15 years without interest. The income limits
for the credit are $170,000 for joint filers
and $95,000 for single.
• Real estate
tax deduction for non-itemizers. Taxpayers who
do not itemize their deductions will be allowed
a deduction for real estate taxes paid up to
$1,000 for joint filers and $500 for single
filers, in addition to the standard deduction.
• Partnership
and Trust due Dates. Beginning this year partnership
and trust that receive an extension of time
to file will no longer be extended until October
15th, they will now be due on September
15th. This also means that any retirement
plan contributions owed by the partnership must
be made by September 15th.
• Mortgage
debt forgiveness. The Mortgage Relief Act, allows
taxpayers to exclude up to $2 million of mortgage
debt forgiveness on their principle residence.
Under prior law the taxpayer would have to claim
the amount of forgiveness as income.
• Under the
previous law a taxpayer that had converted a
principle residence to a rental or vacation
home, or vice versa, and had lived in the home
for 2 of the last 5 years could exclude up to
$500,000 of gain on the sale. The new law for
sales after 2008 reduces the exclusion for the
time period of ownership that the home was not
used as a primary residence. This law does not
include any period of time prior to 2008.
All of this material can be a lot to comprehend,
and the details of all these provisions can
make it even more complicated. Fortunately,
you won't have to remember all of it by yourself.
The two most important pieces of tax advice
that we can give are to keep good records and
ask questions if you have them. We look forward
to hearing from you.
Wishing you a wonderful holiday season and
a New Year filled with loads of good health.
Sincerely yours,
Toscano & Ardito, PC, CPA's
