Henry
V. Kaelber, CPA, CFP®
(The
CPA Firm Arm of ELF Capital Management LLC)
November
14, 2008
This is a special edition Tax
Planning Letter for friends and clients of Henry V. Kaelber, CPA, CFP® and ELF
Capital Management LLC. If you do not
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2008 Year End Tax Planning Traps and Opportunities
It’s that
time of year again! You still have a
little time to consider planning for that income tax bill that comes due soon
after New Years. If you make some good
decisions now, you can save a bundle!
With our new President-Elect and some of the changes that Congress has
already passed, there are many opportunities to save and traps to avoid.
While at
each year-end you may think that you’re hearing the same advice, it’s the
nuances in this information that can foil you.
Under normal circumstances, tax planning usually involves recommending a
deferral of income and or accelerating of deductions. However, this year, it may be more
advantageous for some choosing to do the opposite. For example, if Mr. Obama really wants to
raise rates for couples with incomes over $250,000 and singles over $200,000,
persons in that category may want to accelerate income and delay deductions
before year end.
Rather than
try to compose a comprehensive list, I’ll just touch on some of the highlights
and focus more on investment related themes.
This way, you can be alerted to some concepts to follow up on with your
tax advisor. If you don’t have one, my
firm is eager to establish new client relationships. Here’s a Contact Link for you.
Itemized deductions
Much is the
same as for prior years, yet two things strike me as noteworthy. First, for 2008, the new standard deduction
is $10,900 for married couples filing jointly and $5,450 for singles. This year and next, married couples can
factor in an extra deduction of up to $1,000 (singles $500) for property taxes
paid on top of that. If your itemized
deduction amounts are usually close to the standard deduction amount, you may
want to consider this opportunity in your planning. Second, don’t forget that you have an option
to deduct state and local sales taxes in lieu of state and local income
taxes. If you’ve purchased an auto
during the year, you can add the sales tax paid to the table amount in figuring
this deduction. Keep these tidbits in
mind when you are determining whether to accelerate or defer other itemized
deduction items that you have more control over.
Investment Related
Tax-loss
harvesting often dominates year end tax planning discussions for many
investors. As I have already covered
this topic in great detail in a prior writing, you can review it by clicking on
this link (Tax Loss
Harvesting).
For 2008
through 2010, the tax rate for qualified dividends and net long-term capital
gains has been reduced to 0% (yes, zero) for filers below the 25% tax
bracket. For married couples filing
jointly, the 25% tax bracket begins at $65,100 of taxable income and $32,550
for single filers. For filers at or
above the 25% bracket, the maximum rate remains at 15% for 2008. Yet President-Elect Obama has indicated a
desire to change that 15% max rate to 20% when he gets his chance at tax
reform. If you are fortunate enough to
have net long-term capital gains this year and you are in the 25% or higher tax
bracket, you might want to realize them before year end.
Short-term
capital gains and non-qualified dividends are taxed at ordinary income
rates. You also should be aware that
capital gains involving collectibles and recaptured depreciation on real estate
investments have different rules and higher maximum rates that apply.
It’s also
important to note that you can’t utilize the favorable treatment on qualified
dividends unless you have held your shares for 60 days prior to and after the
ex-dividend date or if you use the dividend income to help you deduct margin
interest on your return. Under the
rules, your ability to deduct margin interest is limited by your investment
income. While short-term capital gains
can be used to boost this deduction, if you elect to use your qualified
dividend income to help boost your margin interest deduction, you will forfeit
the 0% or 15% maximum tax rate on them.
If boosting
your itemized deductions is to be part of your 2008 tax strategy, you may want
to factor in the potential for bumping up into the AMT (alternative minimum
tax). The AMT is much like a flat tax
that been part of the tax code for decades and was originally enacted to impact
only the wealthiest of taxpayers.
However, because the AMT wasn’t indexed to inflation, it impacts many
middle income earners now. A number of things can trigger it. Taking large long-term capital gains (if you
have them) can make it trigger; and claiming a large amount of itemized
deductions or personal exemptions are common culprits as well. If you find yourself subject to the AMT, you
may not want to waste too many of your excess deductions or create tax-preference
income that will effectively be neutered by it.
Lastly,
speaking about investments, I recently invested in an online travel company
that offers the same or better prices as other online travel websites. All travel is booked through a large,
publicly traded travel company that licenses the right to use their site. Right now, it is a tax deduction for me;
however, I do have the ability to share in profits. If you are planning travel for business or
pleasure, please give www.marketlettertravel.com
a try and compare it for yourself. Your
patronage would be appreciated and will help offset the time and production
costs in researching, writing and distributing these letters.
Consumer Alert
Be on the
look out for a scam that surfaced earlier this year and has resurfaced
again. It is preying on people regarding
the economic stimulus payment from the US Treasury.
The IRS
warns taxpayers to be on the alert for e-mails and
phone calls they may receive which claim to come from the IRS or other
federal agency and which discusses the economic stimulus payment. These
are almost certainly a scam whose purpose is to obtain personal and
financial information — such as name, Social Security number, bank account
and credit card or even PIN numbers — from taxpayers
which can be used by the scammers to commit identity theft. The e-mails and calls usually
state that the IRS needs the information to process a refund or stimulus
payment or deposit it into the taxpayer's bank account. The e-mails
often contain links or attachments to what appears to be the IRS Web site
or an IRS payment application form.
However genuine in appearance, these phonies are designed to elicit
the information the scammers are looking for.
The IRS
does not send taxpayers e-mails about their tax accounts.
Additionally, the way to get a tax refund or stimulus payment, or to arrange
for a direct deposit, is to file a tax return.