With the end of the year approaches, now is a good time to engage in tax planning. By implenting tax saving strategies now, you may save taxes for this year, next year, or both years.
Year-end tax planning may prove to be more of a challenge this year than in the past because many deductions that expire at the end of 2007 may be extended by Congress. For individuals, expiring tax breaks include the option to deduct state and local sales and use taxes, the abovethe-line deductions for qualified tuition expenses and educator expenses, and the credit for making qualifying energy savings improvements to a home. For businesses, these breaks include faster write-offs for leasehold and restaurant improvements and enhanced deductions for certain contributions to charity.
We’ve compiled a checklist that may help you to save taxes if you act before year end:
- Increase the amount you set aside for next year in your employer’s health flexible spending account. Don’t forget about over-the-counter drugs, such as aspirin and antacids.
- If you have sold stock or other capital assets, or have such 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.
- This year, the kiddie tax rules apply to kids under age 18; next year they will also apply to most children age 18 and most full-time students age 19 through 23. If your child holds appreciated stock and isn’t subject to kiddie tax this year but will 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% next year.
- It may be advantageous to try to arrange with your employer to defer your bonus until next 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 such as subscriptions to professional journals, union or professional dues, and paying tuition for job-related courses.
- If you are facing a penalty for underpayment of estimated tax, you may be able to eliminate or reduce it by increasing your withholding.
- 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 unused exclusions from one year to the next.
- If you’re thinking of donating a used auto to charity, be sure to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction.
- Consider making credit-eligible energy saving improvements to your home, or if you’re thinking of buying a hybrid vehicle eligible for the credit, consider doing so by year end.
- If you are an employee, consider asking your employer to increase withholding of state and local taxes to pull the deduction of those taxes into this year.
- If you’re a business owner, consider making expenditures that qualify for the $125,000 business property expensing option.
- 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.
- If a corporate liquidation is planned, delaying the distribution of assets until 2008 will defer a shareholder’s gain or loss.
- Consider establishing a retirement plan for your business before December 31. Employer contributions to qualified plans are deductible.
- Holiday parties given for employees are not subject to the 50% limitation that applies to meals and entertainment, as long as the expense isn’t lavish or extravagant.
- Consider using a credit card to prepay expenses that can generate deductions for this year.
- Accrual basis taxpayers should consider accruing year-end bonuses to employees who are not controlling shareholders. They are deductible even though paid in the following year, and the bonus won’t be taxable to the employee until 2008.
These are just some of the year-end steps that can be taken to save taxes. Please review the list and contact us at your earliest convenience so that we can advise you on which taxsaving moves to make.