The year 2009 was marked by many changes affecting estate planning and related areas on…
2007 Year-End Tax Planning Tips
Year-End Tax Planning Tips
Due to uncertainty over the pending “extender” legislation, this year may prove to be more challenging than usual.
We expect Congress to provide another one-year patch to assure that moderate incomes are not entrapped by the Alternative Minimum Tax (AMT) in 2007; however, there may be other last minute tax increases to pay for this solution.
There are also a number of important tax breaks expiring at the end of 2007. For individuals, these include the above-the-line deductions for qualified tuition expenses and educator expenses, the tax credit for home energy saving improvements, (such as insulation and energy-saving windows), and the option for individuals who have attained age 70½ to transfer IRA funds directly to charity.
The actions below may help you save taxes, but you must act before year-end (not all actions will apply for everyone):
Capital gains and losses If you have recognized any capital gains or losses from the sales of stocks or other capital assets (or you have some that are ripe for sale), it may be advisable to meet to discuss how you can best coordinate timing your gains and losses to minimize tax. Also, reviewing any pending December mutual fund capital gain distributions will be important. A recent Wall Street Journal article suggested that above average capital gain declarations are coming this year-end.
Zero capital gains rate may apply in 2008 If you or a family member are considering a sale of appreciated stock or other capital assets, and the income is not taxed at a rate higher than 15 percent, it may pay to hold off on the sale until 2008. This may result in a zero tax on some or all of the gain. If you sell this year, the 5 percent tax on lower rate capital gains will apply.
Gifts of appreciated assets If you have stock or other capital assets that have appreciated in value, consider making a gift of those assets to a child or other individual in a lower tax bracket.
Kiddie tax changes In 2007, the kiddie tax rules apply to children under age 18. In 2008 and after, they also ensnare most children age 18 and most full-time students age 19-23. If your child holds appreciated stock and is not in kiddie tax territory this year but will be in 2008, consider having the child sell in 2007 ahead of the new rules (or consider a gift of your securities to the child, followed by a sale in 2007). In many cases, this will result in a 5 percent tax on the gain, instead of a 15 percent rate if the sale is postponed until 2008.
Reducing underpayment penalties Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by a last-minute adjustment to tax withholding.
IRAs and charitable contributions If you are age 70½ or older, own IRAs, and are considering any charitable contributions before year-end, consider arranging for the gift to be made directly by the IRA trustee. This can achieve important tax savings, but may not be available after 2007 unless Congress acts to extend the provision.
Self-employed retirement plans Self-employed individuals should consider setting up a self-employed retirement plan, or perhaps modifying the type of plan they use in order to enhance their deduction.
S corporation or partnership losses 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.
Open a Health Savings Account (HSA) For those without employer-subsidized health insurance, consider adjusting your health insurance policy to “high deductible” status ($1,100 of out-of-pocket exposure for individual or $2,200 for family coverage). If done before year-end, you are eligible to fund up to $2,850 for an individual plan or $5,650 for family coverage into a pre-tax HSA.
Timing of itemized deductions Consider prepaying expenses that generate deductions, such as state income taxes, real estate taxes, charitable contributions, and other itemized deductions.
Energy-saving home improvements If you are thinking of making energy-saving improvements to your home, such as putting in extra insulation or installing energy-saving exterior doors or windows, consider doing so before year-end in order to qualify for a tax credit that may not be available after 2007. Some appliances, such as furnaces or hot water heaters, also qualify.
Hybrid vehicle tax credit If you are considering the purchase of a hybrid vehicle, purchase it before year-end to be eligible for a tax credit (but if you are subject to the AMT, the credit is not available).
Donating used autos to charity If you are thinking of donating a used vehicle to charity, consider inquiring about the charity’s plans to sell the car or alternatively use it in its charitable activities. The latter may yield a greater tax deduction for you. If the charity simply sells the auto, the deduction is limited to the charity’s sale price.
Other charitable changes 2007 brings a new harsh rule regarding cash contributions. Only those documented by a cancelled check, credit card charge, or a receipt from the charity qualify. Miscellaneous out-of-pocket cash donations without a receipt are no longer deductible. But on the positive side, Congress has improved the deductibility of qualified conservation charitable easements. In these arrangements, you may be able to retain ownership of the property, but restrict future development. Diminishing the value of the property in this type of permanent easement can create a significant charitable income tax deduction, as well as significant estate tax savings.
Self-rental income Do you lease real estate to your own business entity? If so, the passive activity loss rules present a significant threat. If your 1040 has a mix of positive and negative rental activities, the passive loss risk needs to be carefully assessed.
Gift and estate taxes You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before year-end. You may give $12,000 in 2007 to an unlimited number of individuals to reduce the costs of an onerous 45 percent federal estate tax to your heirs, but you cannot carry over unused gift exclusions from one year to the next.