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Year-End
Planning Letter To Our Clients: As the end of the
year approaches, it is a good time for you to engage in tax planning, which will
be more challenging than usual because of uncertainty over whether and how
Congress will extend AMT relief to avoid millions more becoming entrapped by it
in 2007, and whether Congress will extend a number of important tax breaks
expiring at the end of 2007. For individuals, these include the option to deduct
state and local sales and use taxes, the above-the-line deductions for qualified
tuition expenses and educator expenses, the tax credit for making qualifying
energy saving improvements to a home, such as insulation and energy-saving
windows, and the option for individuals who have attained age 70-1/2 to exclude
up to $100,000 a year for otherwise taxable distributions from an IRA (or a Roth
IRA) that are paid directly to a qualifying charitable organization by the IRA
trustee. For businesses, tax breaks that will expire at the end of this year
unless they are extended by Congress include the research tax credit, faster
writeoffs for leasehold and restaurant improvements, and enhanced deductions for
certain contributions to charity. We have compiled a
checklist of actions that may help you to save taxes if you act before year-end.
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 or losses from sales of stock or other capital assets or you have
stock 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 or a
family member are thinking of selling appreciated stock or other capital assets,
and your (or their) income isn't taxed at a rate higher than 15%, it may pay to
hold off on the sale until 2008. That way you may pay a zero tax on the gain; if
you sell this year, you will pay a 5% tax on the gain. •It may be
advantageous to try to arrange with your employer to defer a bonus that may be
coming your way until 2008. •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. •Consider using
a credit card to prepay expenses that can generate deductions for this year. •If you are
thinking of making energy saving improvements to your home, such as putting in
extra insulation or installing energy saving windows, consider doing so before
year end in order to qualify for a tax credit that may not be available after
2007. •If you are
thinking of buying a hybrid vehicle eligible for a tax credit, purchase it
before year-end. •You may want to
pay contested taxes to be able to deduct them this year while continuing to
contest them next year. •Business
clients also should consider making expenditures that qualify for the $125,000
business 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. •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 2007 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 18; next year they will also ensnare
most children age 18 and most full time students age 19 through 23. If your
child holds appreciated stock, and isn't in kiddie tax territory this year but
will be in 2008, consider having him or her sell the stock this year. In many
cases this will result in a 5% tax on the gain, instead of 15% if the sale is
postponed till next year. •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. •If you are
contemplating marriage or divorce consider how marriage penalties could affect
you. •If you are age
70-1/2 or older, and own IRAs (or Roth IRAs), and are thinking of making a
charitable gift before year-end, arrange for the gift to be made directly by the
IRA trustee. Such a transfer can achieve important tax savings but it won't be
available after 2007 under current law. •If you are
receiving Social Security benefits, there are a number of steps you can take to
reduce or eliminate tax on your benefits. Consider asking your employer to
increase withholding of state and local taxes to pull the deduction of those
taxes into this year (but only if doing so won't cause an AMT problem). •Consider
extending your subscriptions to professional journals, paying union or
professional dues, enrolling in (and paying tuition for) job-related courses,
etc., to bunch into 2007 miscellaneous itemized deductions subject to the
2%-of-AGI floor. •Depending on
your particular situation, you may also want to consider deferring a
debt-cancellation event until 2008, electing to deduct investment interest
against capital gains, and disposing of a passive activity to allow you to
deduct suspended losses. These are just
some of the year-end steps that can be taken to save taxes. Again, by contacting
us, we can tailor a particular plan that will work best for you.
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